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Interviews with Our Editors: In Conversation with Eleonora Coelho, President of the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC)

Mon, 2021-08-23 01:52

Welcome to the Kluwer Arbitration Blog, Ms. Coelho!  We are grateful for this opportunity to learn more about the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada (CAM-CCBC), and its administration of complex disputes, as well as about the attractiveness of São Paulo and Rio de Janeiro as seats for international arbitration. 

  1. To start, can you briefly introduce yourself and explain your role at CAM-CCBC?

I am a Brazilian lawyer based in São Paulo, Brazil, who acts as counsel and sits as arbitrator in domestic and international arbitrations. I completed my LLB from the University of São Paulo Law School and my master’s degree in arbitration from the Université Paris II at the turn of the millennium. I have published extensively and have taught on arbitration, and I am currently a visiting professor in the LL.M. on Transnational Arbitration at Sciences Po. Further, I was the vice president of the Brazilian Arbitration Committee (CBAr) and I am the current president of the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, CAM-CCBC, the largest and most important centre of arbitration in Brazil.

 

  1. Now that the Brazilian Arbitration Act has been in effect for 25 years, how do you see the role of arbitration institutions, including of CAM-CCBC, in promoting arbitration in Brazil?

To an extent, it is possible to say that the process of consolidation of arbitration in Brazil is intertwined with CAM-CCBC’s growth. CAM-CCBC went from being a two-room-two-case office in the 90s to today’s caseload of 400 arbitrations per year.

As much as CAM-CCBC is based in Brazil and a highly regarded institution by Brazilian practitioners, we do not see ourselves as promoting arbitration specifically in Brazil. Over the last four decades, CAM-CCBC has built a unique experience administering highly complex domestic and international disputes. We have established agreements with more than 20 other institutions worldwide, sent representatives to the most important arbitration events and strove to promote arbitration everywhere, not only in Brazil. For instance, CAM-CCBC is a long-term sponsor of the Willem C. Vis Moot Court Competition and holds every year not just one but two pre-moots in preparation to the main event, one of them in São Paulo and the other in Hamburg. Every year we promote workshops, networking sessions and other events in São Paulo, Lisbon, New York City, Oxford, Vienna, and other venues. Just last year, for instance, we had 25 webinars, several of them in English. We believe that this careful attention to international trends brings Brazilian arbitration closer to international practices, nudging the domestic market towards the right directions ever since the Brazilian Arbitration Act went into force.

CAM-CCBC is the appropriate institution for a range of disputes. There are Portuguese speaking countries in 4 continents who negotiate commercial relations in Portuguese and need an institution with a list of outstanding Portuguese speaking arbitrators. Further, there are contracts concluded between European and Hispanic companies in which they need an institution from a neutral place. There are international agreements with Brazilian state entities in which these entities would not feel comfortable submitting their dispute to a foreign institution, and, at the same time, investors need a sophisticated arbitral organisation to oversee possible disputes.

From my perspective, the role of institutions in Brazil is to respect and understand the domestic practice, but also to push it towards international sophistication.

 

  1. Will the adoption of the new Government Procurement Act (Law n. 14,133/2021) – allowing and encouraging disputes arising from public contracts to be solved through non-judicial methods – affect the number, type or composition of cases the CAM-CCBC administers?

Arbitration with Brazilian public entities is no novelty. Since the beginning of the last decade, and even before that, arbitral proceedings involving government-controlled enterprises are common and increasing in number and size. At CAM-CCBC alone we have administered over 50 cases involving these entities and, as a matter of fact, since 2014 we regulate some aspects of these cases through Administrative Resolutions 09/2014 and later 15/2016. In 2015, Brazil had already gone through a major reform in its Arbitration Act and one of the main changes was to explicitly provide for the lawfulness of arbitrating with state entities. Now, the new Procurement Act goes one step further towards modern public contracts, codifying what practice has already allowed: the state can, and is incentivised, to use non-judicial methods when adequate. We already manage a substantial number of the largest proceedings in which Brazilian state entities are involved and the trend seems to go up for the following years. I can only believe that with the new Public Procurement Act in force, the legal certainty it provides will allow for more public contracts to include CAM-CCBC’s dispute resolution clauses.

 

  1. The CAM-CCBC arbitration rules are considered to be aligned with most internationally recognized arbitration rules and are one of the most important elements to the Center’s success, what is the main difference or advantage between these rules and rules issued by other institutions? Is there a particular feature of the rules that reflect Brazil’s practice of arbitration, or which are particularly useful for parties arbitrating against public entities in the country?

CAM-CCBC’s rules were issued in 2012 and revised in 2016. Through the accumulated experience of 13 years under the previous Rules and the challenges brought by various cases administered until then, CAM-CCBC 2012 Rules introduced enhancements to the way arbitration is conducted in Latin America. At the time, CAM-CCBC had introduced in Brazil mechanisms that were becoming the standard internationally, such as (i) the prima facie analysis of the dispute before constitution of the tribunal; (ii) provisions for multiparty arbitrations; (iii) different restrictions to the appointment of the chair; and (iv) detailed provisions regarding costs.

Most importantly, CAM-CCBC introduced the Administrative Resolutions framework: these are documents issued by CAM-CCBC’s presidency to update the functioning of the centre and regulate some intraprocedural matters. The innovation of allowing Administrative Resolutions to solve minor issues and gradually update the main Rules has guaranteed that the Centre maintained the same set of Rules in force for nearly ten years. This way of updating our arbitration proceeding allowed us to pioneer major changes without the burden of issuing revised sets of arbitration rules. The Centre has addressed several important issues via Administrative Resolutions, including arbitration with state-owned entities, third party funding, emergency arbitrator proceedings, and expedited arbitration procedure. I believe that through these Administrative Resolutions we have achieved a fine balance between certainty and innovation.

 

  1. Please tell us more about your users and their disputes.
    • What kind of parties do you usually serve, and are there particular industries or types of disputes prevalent among them? What percentage of your arbitrations relate to international disputes?

CAM-CCBC has not one specialisation when it comes to types of parties or disputes. Nevertheless, our 2020 caseload does reveal patterns worth sharing. For instance, currently more than 40% of our cases relate to corporate disputes, many arising out of recent M&As or other corporate operations. Two other substantial sources of disputes are contracts for the sale of goods and infrastructure agreements. When we investigate the business sectors involved, the spread is more diverse. Construction, Electricity, Commerce and Transport represent each roughly 15% of our 2020 cases. Financial services, Agriculture and IT come right after, with approximately 7% each.

Our percentage of international disputes is close to 17%, with the remaining being domestic arbitrations. Among international parties, litigants from the USA, Uruguay, Netherlands and France constitute almost 60% of all international parties at CAM-CCBC’s cases. However, there is a caveat here. For fiscal reasons, most multinational companies that invest in Brazil create a national subsidiary. When an international dispute arises, thus, it is usually carried between these subsidiaries and the Brazilian counterpart. Therefore, we end up categorising it as a domestic dispute. A substantial part of the 83% of cases tagged as domestic is, in fact, international.

 

  • In recent years, the CAM-CCBC has experienced a steep increase of proceedings (over 40% in 2017), what are the reasons for the Center’s success and how did it manage to administer this upsurge of cases?

We like to think that CAM-CCBC’s success is due not only to its rules, but to its very particular manner of managing arbitration. We have state-of-the-art hearing centres and digital infrastructure designed to rival the largest arbitral institutions, while maintaining the type of hands-on case management you would expect from a small hyper-specialised organisation.

Further, we aggregate a large caseload, tailor-made case management and comparatively low fees. These points are essential. Case managers at CAM-CCBC are instructed to closely manage the arbitrations, controlling deadlines, communications, and the proceedings as a whole. Although CAM-CCBC’s case managers are hands-on with their cases, CAM-CCBC’s intervention ends there. The CAM-CCBC does not scrutinise arbitral awards.

 

  1. We understand CAM-CCBC has founded a young arbitration practitioners group called New-Gen. Could you please tell us about this initiative and others CAM-CCBC is taking to promote the study and practice of international arbitration among young practitioners?

NewGen is CAM-CCBC’s group for innovative thinking and creative design of the future of ADR’s. It was created just years ago but it has grown exponentially and now it has more than 400 members throughout the world. The group is organised in a way that members are required to be active, rather than passive, parts of the project. NewGen is constantly calling for papers, investing in the education of its members through specific training, and questioning what the new generations think of our current methods. Recently we offered a mediation training for NewGen members with renowned professionals from Germany and Austria. It is our understanding that the new generation will bring new ideas, solutions, and credibility to arbitration practice. This is why we chose to empower new generations through NewGen. The ball will be in their court soon, best that they are ready when it gets there.

 

  1. The COVID-19 health crisis has caused and is expected to keep causing unprecedented disruptions to several sectors of the economy and business relationships, such as those in the oil and gas sector. How has the pandemic affected the CAM-CCBC, its caseload and how did it face the challenges brought by this crisis?

Throughout the last year, we reinforced our commitment to improving ADR methods, always guided by our duty towards social responsibility and ethical performance. Despite physical distancing, our secretarial staff remained accessible along the year. This is all part of CAM-CCBC’s institutional policy: our greatest responsibility is to deliver the best possible service to the parties, lawyers and arbitrators acting in our proceedings. In fact, in only 48 hours after the pandemic’s breakout, CAM-CCBC organised itself to ensure the remote continuity of more than 300 cases. Administrative Resolution n. 40/2020 provided rules for the remote management of proceedings. We have also put in place a project that was already in progress: the complete migration to electronically conducted arbitrations and mediations, equally efficient and secure. We have also expanded our academic activities virtually, organising 25 webinars, the VII CAM-CCBC Arbitration Congress, in hybrid format, and the III São Paulo Arbitration Week (SPAW), held entirely online.

The impact on our cases was substantial. Without the need to send and receive hard copies, electronic filling made the process faster and also cheaper. From March 2020 to December 2020, a total of 15,498 letters were not sent in hard copies, a decrease of 97% in comparison with 2019. It saved approximately 522,000 Brazilian reais in courier costs and an immeasurable benefit to the environment. One of our studies regarding arbitration proceedings costs during the pandemic revealed a decrease of 93% in spending related to hearings, exchange of hard copies, coffee breaks and others.

The lower expenditure comes with a bonus: higher efficiency. With the full visualization of our services, our Secretariat achieved a whole other level of speed while managing arbitrations, mediations, and dispute boards.

Also, last year CAM-CCBC administered 418 proceedings, our largest caseload in history. I believe that through quick action and sensible measures we have managed to balance all interests involved and do the best we could, given the circumstances.

 

Thank you for the interview – we wish you and CAM-CCBC all the best!

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Delegation of Tasks to Arbitral Secretaries: Striking the Right Balance?

Sun, 2021-08-22 01:31

A recent, still unpublished, judgment of the French-speaking section of the Brussels Court of First Instance (Belgium) (the “Brussels court” or the “court”) provides an excellent opportunity to take stock of recent developments on the much-debated topic of delegation of tasks to arbitral secretaries. Russia famously put the arbitral secretary in the spotlight in the annulment litigation following the Yukos award (see blog posts here and here). While a final decision in that case is still pending before the Dutch Supreme Court, state courts in other jurisdictions have in the meantime also had the opportunity to reflect on the role of arbitral secretaries. In its judgment of 17 June 2021, the Brussels court provides clear guidance on the issue.

 

Allegations of Improper Delegation to the Arbitral Secretary

The court was asked to rule on a petition for annulment of an interim award in an ongoing ICC arbitration. The request was based (inter alia) on allegations of improper delegation by the arbitrators. The tribunal, composed of three arbitrators, had appointed an arbitral secretary in accordance with the procedure prescribed by the ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration in the 2019 version (the “ICC’s Note” or the “Note”), available here. The parties had expressly consented to the appointment of the arbitral secretary, an associate at the chairman’s law firm.

After the award was rendered, the defendants raised questions about the role of the arbitral secretary with regard to a particular issue that was decided in favor of the claimant. The defendants queried whether the secretary had authored the chair’s list of questions for the expert witnesses, and which role she had played in drafting the arbitral award. The chairman of the tribunal affirmed that the secretary had prepared his questions. He also acknowledged that she had been present during the deliberations of the tribunal and had assisted in drafting the award, though that he had reviewed every sentence and footnote, and that he had corrected the draft where he thought appropriate based on his judgment and the deliberations with the co-arbitrators.

The defendants concluded that it was in fact the secretary who had decided the issue in question, in violation of the guidelines in the ICC’s Note. To further substantiate their allegation, the defendants asked the arbitral tribunal to produce a detailed break-down of the hours spent by the secretary on the list of questions and on the different sections of the award, as well as a copy of the list of questions and award sections drafted by the secretary. The tribunal dismissed the request.

Shortly thereafter, the defendants filed a petition for annulment of the award before the Brussels court. They argued that the involvement of the secretary surpassed her legal powers, resulting in irregularities in respect of both the composition of the tribunal and the conduct of the arbitral proceedings. Under Belgian law, pursuant to Article 1717, §3, a), v) of the Judicial Code, such irregularities can lead to annulment of an arbitral award.

 

How Far Can an Arbitral Tribunal Go in Delegating Tasks to the Secretary?

To address the issues raised, the court predominantly focused on the ICC’s Note. It first reiterated that a variety of tasks can be assigned to a secretary, including legal research, drafting factual portions of the award, and taking notes of the deliberation (para. 185 of the Note). In the view of the court, this means that a secretary’s work is not limited to purely administrative tasks. It also encompasses intellectual contributions, which could potentially impact the decision-making process of the tribunal. However, the court continued, there must be safeguards in place to prevent undue influence by the secretary. As an example of such safeguards, it referred to para.184 of the ICC’s Note, which prohibits the tribunal from delegating any of its decision-making functions.

The court went on to analyze para. 187 of the ICC’s Note, which states that “a request by an arbitral tribunal to an administrative secretary to prepare written notes or memoranda shall in no circumstances release the arbitral tribunal from its duty personally to review the file and/or to draft any decision of the arbitral tribunal”. In the court’s opinion, para. 187 implicitly authorizes a tribunal to rely on its secretary to draft parts of an arbitral award or even the entire award, as long as the tribunal reviews and corrects the draft according to its own views. If the ICC would have wanted to exclude this possibility, the court ruled, it would not have used the words “and/or” in para. 187.

The court then proceeded to apply these principles to the facts of the case. It noted that the parties had consented to the appointment of the arbitral secretary after review of her curriculum vitae. They had also accepted the applicability of the ICC’s Note. In addition, the secretary had followed specific trainings for arbitral secretaries organized by the ICC, including sessions on “drafting enforceable awards”. She was also of relatively young age, which reduces the risk of undue influence on the tribunal when compared to a more experienced secretary.

First, the court held that asking the secretary to draft a list of questions does not amount to delegation of decision-making in and of itself. In its view, there were no factual elements indicating the contrary, despite an allegation that the president did not seem to know the questions at the hearing. That allegation did not find support in the transcripts and was also contradicted by one of the co-arbitrators as well as the chairman, who confirmed that he had reviewed the questions.

Second, the court did not consider the secretary’s assistance in drafting the award to constitute improper delegation by the tribunal. The chairman as well as the co-arbitrators confirmed that the award was the result of their joint intellectual efforts and that each arbitrator contributed to the award, which they had thoroughly discussed. The secretary had attended the deliberations with the consent of the tribunal but had not taken part in the substantive discussions between the arbitrators. Any drafts provided by the secretary had been reviewed and corrected by the chairman. Given these circumstances, the Brussels court dismissed the allegation of improper delegation by the tribunal.

 

Conclusion: Striking the Right Balance

The judgment of the Brussels Court of First Instance clearly illustrates the need to strike the right balance when it comes to the role of arbitral secretaries. It is in the first place up to the tribunal itself to guard the appropriate balance and to carry out its decision-making tasks with integrity. Nonetheless, the question remains which role the secretary can play. The Brussels court clearly sides with those who consider the arbitral secretary to be more than just an administrative aid. It accepts the possibility of intellectual contributions by the secretary and is even open to the idea of an award that is fully drafted by the secretary, provided that proper checks and balances are in place to ensure that ultimately the arbitral tribunal makes the decisions.

The opinion of Advocate General Vlas in the Yukos case (see blogpost here) goes in the same direction and adopts a similar, pragmatic view when it comes to the role of the arbitral secretary. It remains of course to be seen whether the Dutch Supreme Court will follow suit. In our opinion, (careful) delegation and decision-making can go hand in hand. As Constantine Partasides has pointed out on different occasions, balancing delegation and decision-making is not at all unique to arbitration. Indeed, similar considerations apply for example to Law Clerks assisting the US Supreme Court or Referendaires at the European Court of Justice, without leading to much controversy regarding the decision-making process.

Finally, this case also illustrates the difficulty of balancing transparency to the parties on the one hand with the secrecy of deliberations on the other hand. This is perhaps even the trickiest topic, as parties alleging improper delegation would certainly benefit from further transparency by the tribunal and/or the secretary, which at the same time may endanger the secrecy of deliberations. The Brussels Court of First Instance clearly gave a lot of weight to the statements of the chairman and the co-arbitrators in response to the allegations raised, with very limited other evidence being available. Parties alleging improper delegation therefore seem to face an additional, evidentiary, hurdle.

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Double Hatting, Sports Arbitration and Article 6(1) ECHR: A Recent Decision by the Paris Court of Appeal

Sat, 2021-08-21 01:00

On 8 June 2021, the Paris Court of appeal (CoA) rendered an interesting decision dealing with the issue of so-called “double hatting” in sports arbitration. The issue of double hatting can no longer arise with respect to proceedings before the Lausanne-based Court of Arbitration for Sport (CAS), as Article S18(3) of the Code of Sports-related Arbitration (CAS Code) explicitly provides, since its 2010 edition, that “CAS arbitrators and mediators may not act as counsel or expert for a party before the CAS”. The Paris CoA’s decision is notable as it concerned annulment proceedings brought against an award rendered by the Chambre Arbitrale du Sport of the French National Olympic Committee (CAS-CNOSF), an institution that, like the CAS, requires that arbitrators be appointed from a closed list, but, at the relevant time, did not bar lawyers on that list from acting as party representatives in CAS-CNOSF proceedings.

The dispute at the origin of the challenged award had arisen from a sports agency contract concluded in 2015 between Serge Aurier,1)While the Player’s name is anonymized in the decision, the chronology of events and the indication of the clubs he was employed by allow for his identification. jQuery('#footnote_plugin_tooltip_38432_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38432_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); a professional football player of Ivorian nationality (the Player), then playing in France, and Sports Management International SA (SMI), a Swiss-incorporated company (the Agency contract). The Agency contract provided for the CAS-CNOSF’s jurisdiction to resolve disputes between the parties. In August 2017, when he was with Paris Saint-Germain, the Player terminated the Agency contract, and, shortly thereafter, he signed an employment contract with the English club Tottenham Hotspur FC. In February 2018, SMI filed a request for arbitration with the CAS-CNOSF, seeking the payment of fees under the Agency contract.

A three-member Tribunal was constituted under the CAS-CNOSF Rules then in force. During the arbitration, SMI requested that Mr Aurier’s counsel be precluded from representing him, as she was on the CAS-CNOSF list of arbitrators. That request was rejected.

The CAS-CNOSF Tribunal issued its Award on 21 January 2019, dismissing most of SMI’s claims.

SMI filed an application for the annulment of the Award before the Paris CoA in February 2019, on the ground that the CAS-CNOSF Tribunal’s independence and impartiality and the regularity of its constitution had been compromised by the fact that the Player was represented by a lawyer who was also on the CAS-CNOSF list of arbitrators. SMI relied inter alia on the guarantee of the right to a fair trial under Article 6(1) of the European Convention on Human Rights (ECHR).

Before ruling on the merits of the application, the CoA dealt with two preliminary objections raised by the Player, who challenged both the admissibility of the application and the admissibility of the ground for annulment relied upon by SMI.

 

Admissibility of the Application for Annulment

The Player argued that SMI had incorrectly initiated the proceedings under Article 1492 of the French Code of Civil Procedure (CPC), which governs the annulment of French domestic awards, when in reality the arbitration at hand was international.

As is well known, the distinction between domestic and international arbitration under French law is based solely on an economic criterion, namely whether the “interests of international trade” are implicated in the underlying dispute (Article 1504 CPC). Contrary to the criteria adopted by other dualist laws of arbitration (e.g. Swiss law), the parties’ domiciles or places of incorporation are not relevant in this respect.

In this case, the CoA noted in particular that i) the object of the Agency contract, which was governed by French law and registered with the French Football Federation, was to facilitate the conclusion of employment contracts exclusively with French clubs and in accordance with the French Professional Football League’s requirements; ii) at the time the Agency contract was concluded, the Player was and had been employed by French clubs for several years, and iii) even though SMI had a Swiss bank account, no monetary transfers had been made to that account (§§24-27).

Accordingly, the CoA ruled that the Award had been rendered in a domestic arbitration and dismissed the Player’s objection.

 

Admissibility of the Ground for Annulment Relied Upon by the Applicant

The Player argued, inter alia, that by agreeing to submit the dispute to arbitration, SMI had waived its rights under Article 6(1) ECHR, including the right to have its claims heard by an independent and impartial tribunal (§29).

The CoA dismissed this objection in two paragraphs. First, it affirmed that “[a]lthough the [ECHR] is binding on States and does not directly bind arbitrators, it is for the court hearing the application to set aside an arbitral award to ensure, within the scope of its review, that the award made by the arbitrators does not infringe any of the guarantees protected by Article 6(1) [ECHR] that the parties have not validly waived” (§35, free translation).

Then, it held that “the mere fact of submitting the dispute to an arbitral tribunal as provided in an arbitration clause, and of referring the dispute to the [CAS-CNOSF], cannot be regarded as a waiver of the right to challenge the impartiality or independence of an arbitrator” (§36, free translation).

 

Merits of the Application for Annulment

Turning to the merits, the CoA stated that the question to be addressed was “whether the mere fact that [M.], counsel for one of the parties is on the [CAS-CNOSF] list of arbitrators constitutes a circumstance that is likely to create reasonable doubt in the minds of the parties as to the independence or impartiality of the arbitral tribunal” (§43, free translation).

In answering this question in light of the applicable standards of independence and impartiality (§§44-45), the CoA noted, in characteristically brisk prose, that SMI had agreed to arbitrate under the rules of the CAS-CNOSF, which did not prohibit [M.] from acting as a party representative, which in turn was why the CAS-CNOSF had rejected SMI’s request to forbid [M.] from representing the Player. As an aside, the CoA observed that granting the request would also have affected the Player’s right to choose his lawyer. SMI, the CoA noted, had raised the fact that the Tribunal was composed of three members, as requested by the Player and against its wish for a sole arbitrator, but then failed to put forward any elements supporting the existence of a “dependence relationship” between the members of the Tribunal and [M.], or suggesting that the Tribunal’s ability to decide the case in an impartial manner was affected by the circumstance that [M.] was counsel to one of the parties (§§46-49). The CoA concluded that the latter circumstance alone could not, in and of itself, be deemed to create reasonable doubts as to the impartiality and/or independence of the Tribunal (§50), and thus dismissed the application.

 

Was the Arbitration Domestic or International?

Although it seems oblivious to the fact that the transfer market for football players of Mr Aurier’s level is intrinsically transnational in nature, the CoA’s decision appears to be in line with the well-established French case law interpreting Article 1504 CPC, seeking as it does to determine whether, in the context of the parties’ relationship, there had been “any cross-border transfer” of goods, persons or money. Be that as it may, had the Court found that the arbitration was international instead of domestic, its ruling on the admissibility of the application would likely have been the same, given that the ground invoked by SMI (irregular constitution of the tribunal) is available for both domestic and international arbitrations. Similarly, if the case had been governed by the Swiss lex arbitri, the Swiss Supreme Court would have deemed the action admissible even if it was based on the wrong (but inconsequential) assumption that the arbitration was domestic and not international (or viceversa), given that the ground invoked is (also) the same under both regimes.2)Gabrielle Kaufmann-Kohler & Antonio Rigozzi, International Arbitration – Law and Practice in Switzerland, OUP, 2015, para. 8.17 (the ground of “irregular constitution of the tribunal” is available under both Article 190(2)(a) PILA and Article 393(a) Swiss (CPC)). jQuery('#footnote_plugin_tooltip_38432_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38432_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

The CoA’s Reasoning on the Applicability of Article 6(1) ECHR

The most interesting part of the decision concerns the other objection to admissibility raised by the Player, namely the argument that, by agreeing to arbitrate, the parties had waived the applicability of Article 6(1) ECHR. As just noted, in rejecting this argument, the CoA affirmed that “it is for the court hearing the application to set aside […] to ensure, within the scope of its review, that the award […] does not infringe any of [Article 6(1) ECHR’s guarantees] that the parties have not validly waived”. On its face, this statement (which is not further developed in the decision) could be taken to mean that compliance with the fundamental guarantees of the ECHR constitutes a separate ground for annulment, independent from the grounds provided by the lex arbitri. If this was indeed what the CoA meant, then the solution is different from the Swiss Supreme Court’s approach, which invariably requires that applicants relying on Article 6(1) ECHR’s guarantees establish in which way an infringement thereof amounts to a violation to one of the (exhaustive) grounds for annulment under Article 190(2) PILA (or Article 393 Swiss CPC for domestic arbitrations).

It is also striking that the CoA did not refer to the ECtHR’s most relevant case law on this specific issue, in particular the Mutu & Pechstein decision (see also here and here). In Mutu/Pechstein, the ECtHR held that in cases like the present one, where the arbitration is not mandatorily provided for by the applicable sports rules, limitations of the guarantees of Article 6(1) ECHR contained in the applicable arbitration rules can be valid if they are “free[ly], lawful[ly] and unequivocal[ly]” agreed to (§ 96). It is submitted that silence on a particular issue in the rules (here the absence of an explicit prohibition of double hatting) is not “unequivocal”, and that the CoA was thus correct in rejecting the Player’s objection to admissibility. Conversely, one could argue that the fact that the CAS-CNOSF Arbitration Rules explicitly set out (in Article 20) that the proceedings are confidential, means that the parties must be deemed to have unequivocally waived their right to a public hearing pursuant to Article 6(1) ECHR.

 

Double Hatting and the Importance of Appearances

As to whether the fact that a party was represented by counsel who happened to be on the closed list of arbitrators is in and of itself a ground to set aside the award for lack of independence and impartiality, the CoA’s approach is sensible. It requires a demonstration that, in the specific circumstances of the case, such double hatting can “create reasonable doubt in the minds of the parties as to the independence or impartiality of the arbitral tribunal”. This cannot be ruled out for instance if being on the list of arbitrators of a particular institution can create a strong sense of community between arbitrators. Notwithstanding the CoA’s decision, it is submitted that the CNOSF was well inspired to amend the CAS-CNOSF Arbitration Rules to expressly prohibit double hatting, as it did in December 2020. This will avoid future challenges and strengthen the perception that CAS-CNOSF’s Tribunals act with independence and impartiality: as was also emphasized by the ECtHR in Mutu/Pechstein, appearances are important when “what is at stake is the confidence which the courts in a democratic society must inspire in the public” (§143).

 

 

References[+]

References ↑1 While the Player’s name is anonymized in the decision, the chronology of events and the indication of the clubs he was employed by allow for his identification. ↑2 Gabrielle Kaufmann-Kohler & Antonio Rigozzi, International Arbitration – Law and Practice in Switzerland, OUP, 2015, para. 8.17 (the ground of “irregular constitution of the tribunal” is available under both Article 190(2)(a) PILA and Article 393(a) Swiss (CPC)). function footnote_expand_reference_container_38432_30() { jQuery('#footnote_references_container_38432_30').show(); jQuery('#footnote_reference_container_collapse_button_38432_30').text('−'); } function footnote_collapse_reference_container_38432_30() { jQuery('#footnote_references_container_38432_30').hide(); jQuery('#footnote_reference_container_collapse_button_38432_30').text('+'); } function footnote_expand_collapse_reference_container_38432_30() { if (jQuery('#footnote_references_container_38432_30').is(':hidden')) { footnote_expand_reference_container_38432_30(); } else { footnote_collapse_reference_container_38432_30(); } } function footnote_moveToReference_38432_30(p_str_TargetID) { footnote_expand_reference_container_38432_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38432_30(p_str_TargetID) { footnote_expand_reference_container_38432_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Interpreting Tanzania’s Arbitration Act, 2020

Fri, 2021-08-20 01:20

This post is in response to the post titled “The First Year of Tanzania’s 2020 Arbitration Act” published on the Kluwer Arbitration Blog on 21 April 2021.

In the above-mentioned post, Katarina Jurisic and Michael Wietzorek analysed the provisions of Tanzania’s Arbitration Act 2020 (‘the Act’) and the effect that the Act would have on the jurisdiction. The well-written article provides a deep analysis of the Act, to which we generally prescribe. However, we disagree with certain views of the authors and, in this post, we provide our reactions to some of them, in particular the following statement:

“In addition to this difference, Section 13(3) of the 2020 Arbitration Act appears to be at odds with Section 12(1) of the 2020 Arbitration Act…”

This post therefore presents further opinions in reaction to that statement.

 

Analysis

In our opinion, while conceding that provisions of the Act are open to interpretation, Section 12(1) and Section 13(3) do not seem to be at odds with each other.

Under Section 6 of the repealed Arbitration Act, any application to stay court proceedings pending arbitration would have to be filed before the Defendant files a written statement of defence (‘WSD) or takes any other steps in the proceedings. If the Defendant were to take steps in the proceedings, such as submitting arguments or defenses, it would amount to foregoing his right to submit the dispute to arbitration. The court would first determine the application for stay before making a decision as to whether the dispute should be referred to arbitration or a WSD should be filed by the Defendant.

Section 6 of the repealed Arbitration Act which provided as follows:

Where a party to a submission to which this Part applies, or a person claiming under him, commences  legal proceedings against any other party to the submission or any person claiming under him in respect of any matter agreed to be referred, a party to the legal proceedings may, at any time after appearance and before filing a written statement or taking any other steps in the proceedings apply to the court to stay the proceedings”. (our emphasis)

Currently, under Section 13(3) of the Act, a party cannot make an application for stay of legal proceedings pending arbitration unless he has first taken appropriate procedural steps to acknowledge the legal proceedings against him, or has taken steps in those proceedings to answer the substantive claim. This includes filing a WSD in response to the claim.

Meanwhile, Section 12(1) of the Act states:

A court, before which an action is brought in a matter which is the subject of an arbitration agreement shall, where a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement of claim on the substance of the dispute, and notwithstanding any judgment, decree or order of the superior court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.” (our emphasis)

Contrary to the inference made in the post by Jurisic and Wietzorek, this provision simply means that a WSD should be filed first before making an application to stay legal proceedings. Further, such application should be filed within the statutory deadline of filing a defence, which is within 21 days from the date of service of summons as per Order VIII Rule (1) of the Civil Procedure Code R.E. 2019.

In our view, there is no confusion created by the inclusion of both Sections 12(1) and 13(3) in the Act. Whereas Section 13(3) imposes conditions for applying for stay of proceedings pending arbitration, Section 12(1) imposes a time limit within which such application can be made.

 

The Spirit behind these Provisions of the Act

The aim behind the two provisions is to facilitate the speedy determination of suits. Previously, under the repealed Arbitration Act, where an application for stay of proceedings was dismissed, hearing of the suit could not immediately proceed because the Defendant would not have yet filed his WSD.

Instead, he would then have applied for leave and extension of time to file the WSD, and this would have resulted in a considerable prolonging to the conclusion of pleadings, therefore causing delay in the hearing of the suit.

The Act remedies these issues by providing that if the application for stay of proceedings is dismissed, there would be no need for an extension of time to file the WSD, since one would have been filed before the application for stay was made.

Among the previous cases which set the framework for an application for stay of legal proceedings was the case of Wembere Hunting Safaris Limited v Registered Trustees of Mbomipa Authorized Association, Commercial Case No. 40 of 2013, High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry (Unreported) cited as authority in Travelport International Limited v Precise Systems Limited, Misc. Commercial Application No. 359 of 2017, The High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry (Unreported), where the court stated four conditions for the grant of a stay in legal proceedings pending reference to arbitration, namely:

  • There are legal proceedings commenced by the Respondent and pending in court;
  • There is an arbitration agreement;
  • No WSD has been filed in response to the proceedings commenced or taken other steps in the proceedings; and
  • The petitioner has shown willingness and readiness to do things necessary for the proper conduct of arbitration.

However, the Act now requires the Defendant to acknowledge the proceedings before him, effectively meaning that the third condition is no longer applicable.

The case of Queensway Tanzania (EPZ) Limited v Tanzania Toku Garments Co. Ltd, Misc. Commercial Cause No. 43 of 2020, High Court of the United Republic of Tanzania, Commercial Division, Dar es Salaam Registry, (Unreported) affirmed the position that an application under Section 13(1) of the Act requires the Defendant to first acknowledge the proceedings against him.

We note that under Section 12(1) of the Act a party who wishes to apply for stay of proceedings so as to refer a matter to arbitration must do so not later than the date of submitting his first statement of claim on the substance of the dispute.

We believe the reference to “statement of claim” was unintended and that it was meant to refer to a statement of defence”. The applicant would be a Defendant in the suit and he would be expected to file a WSD, not a statement of claim.

 

Concluding Remarks

Save for the  reference to “statement of claim” which we believe to be unintended and the fact that what amounts to a Respondent acknowledging proceedings against it for purposes of applying for stay is not defined, the provisions of section 12(1) and 13(1) of the Act are clear.  We believe that any confusion arising out of the interpretation of the provision of the Act will be effectively resolved by the courts, and that both investors and practitioners have a reason to smile.

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Filling In The Gaps Left By the US Supreme Court Decision in GE Energy v. Outokumpu: Which Law To Apply?

Thu, 2021-08-19 01:38

The United States Supreme Court’s June 2020 decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC (“GE Energy“) made clear that, under U.S. law, a non-signatory to an arbitration agreement may invoke equitable estoppel to compel arbitration under Article II(3) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) (for more on GE Energy, see here). The Supreme Court did not, however, decide what law should be applied to determine whether equitable estoppel is available for arbitration agreements under the New York Convention – i.e., whether this should be determined by reference to federal or state law.

Instead, the Supreme Court remanded that question to the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”). While the Eleventh Circuit has not yet scheduled the remand hearing in GE Energy, the same question has now arisen before other courts – should federal or state law determine the availability of equitable estoppel?

The case for applying federal law
In a recent decision by the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit“), Balkrishna Setty v. Shrinivas Sugandhalaya LLP (“Setty v. Sugandhalaya”), the majority determined that federal law principles apply to determine whether equitable estoppel is available based on the facts of a particular case.

In that case, two brothers, Balkrishna and Nagraj Setty, signed a Partnership Deed in 1999 agreeing to joint ownership of Shrinivas Sugandhalaya, an incense manufacturing company owned by their late father. The Partnership Deed contained an arbitration clause requiring all disputes in respect of the partnership arising between the partners to be settled by arbitration. After a period of joint operation, the brothers separated and began operating their own incense manufacturing firms, though maintaining the same trademark. Balkrishna, formed Shrinivas Sugandhalaya (BNG) LLP (“SS Bangalore“), whereas Nagraj formed Shrinivas Sugandhalaya LLP (“SS Mumbai“).

After a period of operation, the Plaintiffs-Appellees, Balkrishna and SS Bangalore, commenced litigation against SS Mumbai and its U.S. distributor, claiming that SS Mumbai had committed a number of U.S. federal trademark violations, including having fraudulently obtained trademark registrations. The suit was originally brought in the Northern District of Alabama but was transferred to the Western District of Washington to suit the parties’ convenience, pursuant to 28 U.S.C. § 1404(a).

SS Mumbai moved to dismiss or stay the case in favour of arbitration, arguing that the Plaintiffs-Appellees should be equitably estopped from avoiding the arbitration clause contained in the Partnership Deed. Neither SS Bangalore nor SS Mumbai were parties to the Partnership Deed.

The district court for the Western District of Washington denied SS Mumbai’s motion, applying generalized estoppel doctrine from Ninth Circuit jurisprudence. On appeal, while the Ninth Circuit affirmed the district court in finding that SS Mumbai could not assert equitable estoppel, it did so on the grounds that as a non-signatory to the Partnership Deed, SS Mumbai was barred from compelling arbitration under Article II(3) of the New York Convention.

SS Mumbai then sought, and was granted, certiorari by the Supreme Court on the basis of the Supreme Court’s decision in GE Energy, and the Ninth Circuit’s decision was vacated and remanded. On remand, the parties disputed whether the law of India (the choice of law in the Partnership Deed) or federal common law applied to the question of whether a non-signatory can compel arbitration.

The majority held that Indian law did not apply, noting that to resolve a “threshold issue”, the Court should not look to the agreement itself. Additionally, because the Partnership Deed’s arbitration clause applied to disputes “arising between the partners”, it did not apply to third parties such as SS Mumbai.

Instead, the majority held that federal substantive law applies where a case involves the New York Convention and concerns the arbitrability of federal claims by or against non-signatories to an arbitration agreement. This, the majority found, furthered the principle of uniformity in the enforcement of international arbitration agreements, as emphasized by the New York Convention and its implementing legislation, the Federal Arbitration Act (“FAA”).

The case for applying state law
Interestingly, the case for applying state law was made in a strong dissent to the majority opinion of Setty v. Sugandhalaya. Judge Bea, who authored the dissent, argued that state, not federal law should govern equitable estoppel claims to compel arbitration. Her dissent was grounded in jurisprudence from Chapter 1 of the FAA, which addresses domestic arbitration law (noting that Chapter 2 of the FAA addresses international arbitration law, by incorporating the New York Convention). In essence, Judge Bea stated that jurisprudence from the Supreme Court and Ninth Circuit on Chapter 1 of the FAA had firmly established that the state contract law that governs the arbitration agreement governs equitable estoppel claims to compel arbitration. The fact that the arbitration agreement in this case was under the New York Convention (which is implemented in the United States by Chapter 2 of the FAA) did not merit a departure from this position. Rather, Judge Bea argued, it is in the interests of uniformity that settled FAA law apply to agreements governed by the New York Convention.

Judge Bea relied on the Supreme Court’s decision in Arthur Anderson LLP v. Carlisle, 556 U.S. 624 (2009), which held that the FAA did not “alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)”. (Id. at 630). The Supreme Court held that the application of “traditional principles of state law” is permitted under the FAA to allow a contract to be enforced by or against non-parties through a number of principles, including equitable estoppel (Id. at 631). Judge Bea went on to state that “Since Arthur Andersen, the Ninth Circuit has repeatedly applied state contract law any time a non-signatory has sought to compel arbitration under the FAA.” (Setty v. Sugandhalaya at page 13).

In addition, the Restatement on U.S. Law of International Commercial Arbitration and Investor-State Arbitration (“Restatement”) takes the position that the availability of estoppel is governed by state law (see Comment (c) to §2.3). Though the Restatement is not binding on courts, it has significant persuasive authority such that courts may look to the Restatement to decide which law to apply.

What are the implications of applying federal or state law?
The question of the applicability of federal or state law is not limited to the doctrine of equitable estoppel. In GE Energy, the Supreme Court noted that under the FAA, arbitration agreements can be enforced by non-signatories through “assumption, piercing the corporate veil, alter ego, incorporation by reference, third party beneficiary theories, waiver and estoppel.” (GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637, 1643 (2020)). While the decision in Setty v. Sugandhalaya specifically addressed estoppel, it remains to be seen whether state or federal law will govern these other mechanisms for enforcement of arbitration agreements by non-signatories.

The question of which body of law applies to determine the availability of doctrines like equitable estoppel may have important practical implications. In particular, there may be instances in which the application of federal or state law produces different results when applied to the specific facts of a case. As the case law develops in different courts, parties could take advantage of these inconsistent approaches in determining where to file their claim.

There is therefore high potential for divergence in determining whether a non-signatory can enforce an arbitration agreement. We are likely to see more cases of non-signatories seeking to enforce arbitration agreements concerning the New York Convention in the wake of GE Energy, and it remains to be seen whether federal courts will converge on the methodology for determining the availability of these principles, or whether they will remain divided.

In particular, and as mentioned above, the Supreme Court in GE Energy remanded to the Eleventh Circuit to determine the body of law that governs the enforceability of arbitration clauses under the doctrine of equitable estoppel. It remains to be seen whether the Eleventh Circuit will adopt the same position as the Ninth Circuit in Setty v. Sugandhalaya.

Conclusion
While the US Supreme Court in GE Energy made the important clarification that the New York Convention does not bar non-signatories from asserting equitable estoppel to compel arbitration, gaps remain as to whether state or federal law applies to determine the availability of equitable estoppel on the facts of a particular case. The Ninth Circuit has recently held that federal law applies, albeit with a strong dissent arguing in favor of the application of state law. In light of the important implications arising out of the applicable law, further debate is to be expected.

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Theater and Law: The Use of the Actor’s Technique in Arbitration Advocacy

Wed, 2021-08-18 01:34

A few days ago I had the fortune of attending the fourth webinar of the Young ITA Mentorship Program – Speaker Series, entitled The (Sometimes Forgotten) Importance of the Arts and Psychology in Advocacy in International Arbitration. Part of the dialogue focused on reviewing whether theatrical study could be useful to lawyers in enhancing their oral advocacy. I would like to expand on this topic further, based on my experience as a theater director training lawyers to be more persuasive before arbitral or judicial tribunals.

The first time I asked myself whether theater could have any relationship with law was eight years ago, when ICSID arbitrator Alfredo Bullard invited me to co-teach an advocacy course at PUCP. I found the answer when I realized that litigators tell live stories. And, that just like actors, lawyers also need to know how to manage their body, voice and emotions in a technical way to bring their written speeches (their dramaturgy) to life, catch the attention of the arbitrators and persuade them to rule in their favor. I also understood how useful it can be for lawyers to become aware that – during a hearing – they are immersed in a “staging”: a professional game with specific rules in on which they need to be trained to play a special role. This implies knowing how to project certain characteristics of their personality and having a high level of energy and concentration, because acting as if in any other daily or professional circumstance could be a mistake.

 

Having good actors is as important as having a good case theory

When we talk about how to enhance a lawyer’s live performance, the first thing we need to be aware of is that writing and acting involve different skills. In theater, playwrights are aware of this. They know that the best way to stage their story is to entrust it to a good actor, capable of giving life and credibility to the words they have written on paper. Fortunately, the level of knowledge that exists today about the actor’s technique makes it possible for almost anyone to train and develop stage skills. Achieving this is more a matter of work and conviction than just natural talent.

In the legal world, there is also some level of awareness of the difference between being able to write and having the ability to perform live in an engaging and persuasive manner before a tribunal. However, based on my experience, I can say that this awareness can be further enhanced and better trained.

Unfortunately, I have witnessed many times how some lawyers use the hearing to merely read aloud their written pleadings or to just perform an impromptu and unappealing representation of their case theory. They trust that their body, voice and emotions will be projected to the members of the tribunal the way they have imagined it in their heads the night before or on their way to the hearing, but unfortunately that’s not usually the case. They do not train in the development of their expressive skills, they rehearse little or nothing in the execution of their live pleading and probably do not give themselves time prior to the hearing to warm up their body, their voice nor to focus their emotional intelligence for this professional game. The result on many occasions is that they completely miss the opportunity to bring the case to life in front of their viewers: the adjudicators.

 

How should lawyers organize their body, voice and emotions to persuade?

Based on my research analyzing theatrical, legal and psychological experiences and studies, to be persuasive lawyers should organize their body language, voice and emotions so they always project conviction and empathy. This can make their presentations more memorable and exciting for the tribunal. Research shows that our decisions are more emotional than rational.

…he who leads men must know them and their motives for action. They are generally sentimental rather than rational. Beliefs and desires rule the world. To influence men is thus primarily to influence their feelings.” (Bousquie, p.5. Own translation).

Hence, to be persuasive it is essential to have the ability to emotionally influence people.

Following this logic, it makes sense that the methodology that lawyers use for their live presentations should be structured similarly to how it would be organized by an actor who must assume a persuasive role or character. In fact, many institutions specialized in education or treatment of the voice already have lawyers on their list of spoken word professionals. Therefore, the technique and training to enhance the performance of lawyers can be based on the following principles and components of live communication. First, in relation to body language, being aware of two basic principles: we are how we move and with the body we make actions (Adapted from Stanislavski, pp. 25-105). These are articulated based on three components of body management: eye contact, posture and body placement. Second, in relation to the voice, based on principles similar to the previous ones: we are how we talk and with the words we make actions (Adapted from Stanislavski, pp. 107-201). We naturally articulate these based on six variables of management of the spoken word: pitch, volume, speed, rhythm, direction and listening. Third, in relation to emotional management, using a principle of cognitive psychology: our emotions shape our behavior (Keegan, p.64). A principle that in this case we should articulate by learning to channel self-confidence and empathy.

Although it is impossible to go in depth in these brief lines on everything that lawyers should do with respect to each element of their performance, allow me to give you a few suggestions, by way of example, on what we should do with our body language. Both theatrical tradition and social psychology research agree that, if we want to convey conviction, we should use open postures and movements. Therefore, if you want to transmit solidity, security, and credibility, you should always stand or sit in such a way that you can project your face, neck and trunk widely towards your interlocutors. You will have the opposite effect if you shift your spine, shoulders or chest forward, closing them towards your stomach, or if you cross your arms and clasp your hands together, blocking your trunk or partially or totally covering your neck or face. These latter postures will make you look insecure, nervous, and defensive. And no matter how well your live words are flowing and sounding, you will convey contradictory information to the tribunal who will probably feel distrust, disinterest or rejection, without them being aware of the reason for their negative feelings.

This is why balancing all elements of performance in the right communicative direction can be a major challenge. Many times, lawyers find themselves at a crossroads where their body and voice are projecting contradictory information. Or worse, they have inadequate emotional reactions to the obstacles that arise during the hearing and end up projecting feelings that do not correspond to the action of persuasion, such as fear, anger, guilt, etc. That way their actions during the hearing, far from persuading, become something akin to justifying themselves, confronting, or pleading with the arbitrators.

For these reasons, I would recommend lawyers to train their stage skills so they can enjoy the game of arbitration even more and to obtain good results for their clients. This will happen naturally by having more expressive resources to bring their case theory to life during the hearing and enhance their ability to persuade the tribunal.

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The Antrix-Devas Dispute: Headed for a Third BIT Arbitration?

Tue, 2021-08-17 01:14

In May 2021, India’s National Company Law Tribunal (‘NCLT’) ordered the liquidation of Devas Multimedia (‘Devas’), on grounds of it having been incorporated for fraudulent purposes. This is the latest turn in a long running dispute contested across multiple fora. In this post, I highlight that this could give rise to a third BIT claim against India on grounds of indirect expropriation. To this end, I submit tentatively that: (1) an arbitral tribunal would have jurisdiction over such a claim, because arbitral awards can be the subject of expropriation; and (2) the liquidation of Devas, with the alleged view to preventing enforcement of the ICC award likely amount to an indirect expropriation. Before engaging with these questions, the first section of the post provides a brief outline of the facts leading to this situation.

 

Background to the Dispute

In 2005, Devas entered into a lease agreement with Antrix Corp. (‘Antrix’), the private sector arm of the Indian Space Research Organization (a government-owned body). The 2005 agreement was terminated by Antrix in line with government policy in 2011. This termination gave rise to 3 distinct sets of proceedings—one commercial arbitration before an ICC tribunal, and two investment arbitrations under the India-Mauritius BIT and the India-Germany BIT. Each of these proceedings resulted in an adverse award for the Indian government. While the two BIT awards are still pending confirmation, the ICC award has been upheld by a US Court as well as by the Paris Court of Appeal.

In its liquidation order, the NCLT has expressly directed the official liquidator to liquidate Devas, so as to prevent the enforcement of the ICC award in its favor [p. 38 (7)].

 

Can Arbitral Awards be Expropriated?

Prima facie, the actions of the NCLT as a quasi-judicial body are attributable to the Indian State. A preliminary issue then is whether arbitral awards qualify as ‘investments’ in the first place. The India-Mauritius BIT, under which Devas’ investors may bring a claim, defines ‘investments’ as including “claims to money, or any performance under a contract which has economic value” (Art. 1(a)(iii)). This definition is sufficiently broad so as to include an arbitral award in its scope. The material question now is whether judicial interference with an arbitral award can amount to expropriation to begin with.

It is settled in international law that immaterial rights can be the subject of expropriation (see e.g. Philips Petroleum v. Iran p. 75). A further qualification imposed in some cases is that the award must be final substantively—in other words, any further challenge must only be available as to procedural grounds, and not to the merits of the tribunal’s decision (see e.g. Stran Greek Refineries and Stratis Andreadis v. Greece p. 59-61). In the instant case, the ICC award obtained by Devas was final as to its merits and binding on both parties. Any further challenge to this award at the enforcement stage may only pertain to procedural grounds and not serve as a judicial review of its substantive findings. Therefore, the nature of an arbitral award does not exclude it from being the subject of expropriation.

Schwebel (2004) argues that an arbitral award is the source of material rights to compensation for the award holder, and access to an award is extremely relevant to the conclusion of the initial contract itself. Denial of access to this award, therefore, has a confiscatory effect and constitutes a vitiation of investor rights by the interfering State. While Schwebel makes this argument in the context of an anti-suit injunction, similar concerns would arise with respect to other judicial measures that nullify an arbitral award. In my view, the liquidation of Devas, by virtue of nullifying the enforcement of the ICC award, is analogous to an anti-enforcement injunction nullifying said award. For these reasons, judicial interference with an award can amount to expropriation.

 

Did India Commit Expropriation in this Case?

Expropriation by itself is not illegal per se. The specific contours of what constitutes an unlawful expropriation depend on the BIT under which a claim arises. Art. 6 of the Mauritius-India BIT defines expropriation. It states that for a breach of Art. 6 to arise, (i) there must be an expropriation; and (ii) this expropriation must not be for public purposes, be discriminatory, or without fair compensation. In the instant case, no compensation was paid to Devas following the nullification of its arbitral award. Therefore, a claimant investor need only show that the liquidation order amounted to an expropriation.

Typically, tribunals have used the “sole effects” doctrine to determine whether an indirect expropriation has occurred (see e.g. Saipem Spa v. Bangaldesh p. 133). This doctrine suggests that tribunals rely only on the effect of a State’s measure on an investment, and not the reasons behind introducing that measure. In this paradigm, so long as an investor was substantially deprived of their rights, a claim for indirect expropriation would arise. Given that the liquidation order effectively nullifies the ICC award, Devas’ investors could allege indirect expropriation. However, I submit that the standard to establish indirect expropriation must be higher in cases where judicial interference with an award is alleged as the cause of expropriation. This is because if the sole effects doctrine is applied strictly, any and all decisions rejecting foreign awards (even on valid grounds) would be considered in breach of a BIT—a perverse conclusion. Therefore, claimant investors must demonstrate that the judicial actions interfering with their rights were “illegal”, or violative of international law norms (see Saipem Spa p. 132).

Tribunals have recognised that judicial decisions that are grossly unfair or unjust constitute a violation of international investment law (see e.g. Salini v. Ethopia p. 166 and Saipem Spa p. 149). One possible example of such decisions would be a domestic court making an order in excess of its jurisdiction, on account of State bias. I submit that in the instant case, the NCLT’s order was unlawful as it exceeded the jurisdiction of the NCLT. While the determination of fraud in the affairs of a company is indeed a matter for the NCLT to adjudicate, using fraud as ascertained by the NCLT to stymie the enforcement of an arbitral award creates an appearance of perverse motives, especially considering that the respondent in this case is essentially the Indian State, of which the NCLT is in itself an instrumentality. If nothing else, this gives rise to the appearance of bias guiding the NCLT’s findings. A more appropriate route would have been for the NCLT not to interfere with the enforcement of the ICC award, and treat those proceedings as separate from those concerning liquidation. The NCLT order would have then served only as guidance to the fora hearing challenges to the award itself (i.e., the Delhi HC). Instead, by conflating two proceedings, the NCLT has acted in excess of its jurisdiction, and its actions could be seen as a denial of access to remedies for Devas’ investors.

Even India’s obligations under Art. III of the New York Convention create an overriding commitment towards enforceability, such that allegations of the award being contrary to public policy (such as by being borne out of fraud) must still be settled only by a “competent authority”. If the formation of an agreement was indeed borne out of fraud, then the appropriate forum to settle the same is the Court hearing challenge proceedings. For the NCLT itself to direct that the liquidator ceases the enforcement of the ICC award, amounts to an adverse and unwarranted interference with the arbitral process. BIT tribunals have previously looked unfavourably upon such actions. For example, in the Saipem case, the tribunal held that Bangladesh had breached the NY Convention due to its judiciary ordering the revocation of appointed arbitrators on grounds of misconduct. Importantly, no instance of actual misconduct on the part of the tribunal or Devas has been established yet by the Delhi HC, where the challenge to the award is still sub judice. Therefore, a premature move to nullify the enforcement of the award by seizing control of the award-holder would constitute an expropriation, and breach international law.

On a concluding note, the NCLT order in the Devas case might well come as no surprise to frequent observers of India’s recent dalliance with investment treaty disputes. The liquidation of Devas on account of the finding of fraud, could also imperil the enforcement of awards obtained against India by Devas’ investors under BITs. This is particularly concerning in light of India’s recalcitrance in complying with adverse awards arising out of its disputes with Vodafone and Cairn Energy. Taken collectively, these events are very likely to shake investor confidence in the Indian regulatory regime. Immediate compliance with each of these awards is therefore the ideal course of action that India must adopt.

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Has Forum Non Conveniens Gone the Way of the VCR Player? Canadian Court finds the Doctrine Obsolete in Age of Virtual Hearings

Mon, 2021-08-16 01:00

The COVID-19 pandemic has normalized virtual hearings. According to the Ontario Superior Court, this has made the doctrine of forum non conveniens obsolete. In Kore Meals LLC v Freshii Development LLC, 2021 ONSC 2896, in the context of an application to stay Canadian court proceedings in favour of arbitration in the U.S., the Ontario Superior Court questioned whether the doctrine of forum non conveniens has “gone the way of the VCR player”. The Court answered yes. “In the age of zoom… no one forum is more convenient than another”.

The core finding of this decision is that forum non conveniens no longer applies to stay applications because all forums are equally convenient for virtual hearings. While this case highlights some of the virtues of virtual hearings, it also muddies the water with respect to stay applications in Ontario. Until this decision, forum non conveniens has not been part of the analysis to request a stay of court proceedings in favour of arbitration. Forum non conveniens (Latin for “inconvenient forum”) is a common law doctrine that allows a court to stay an action where there is an appropriate and more convenient alternative forum to try the action.

 

Key Facts

The Plaintiff, Kore Meals LLC, a Houston-based company, and the Defendant, Freshii Development LLC (“Freshii Development”), a Chicago-based subsidiary of Toronto-based Freshii Inc, were parties to a contract to develop Freshii franchises in Texas. A dispute arose and the Plaintiff claimed breach of contract and unjust enrichment.

The contract contained an arbitration clause requiring disputes to be submitted to arbitration under the American Arbitration Association (“AAA”) “in the city where Freshii Development has its business address”, which was Chicago.

The Plaintiff commenced an action in the Ontario Superior Court, suing Freshii Development as well as its parent company, Freshii Inc, though the parent was not party to the contract. The Defendants moved to stay proceedings in Ontario in favour of arbitration in Chicago.

 

Decision of the Ontario Superior Court

The Ontario Superior Court held that the proceeding should be stayed in favour of arbitration in Chicago.

The Court found that Ontario’s International Commercial Arbitration Act (“ICAA“) applied to the case, and underlined the settled doctrine of competence-competence in Canada. Quoting the Supreme Court of Canada (“SCC”) in Uber Technologies Inc v Heller, 2020 SCC 16 (“Uber“), the Court stated “in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator” … “Courts should derogate from this general rule and decide the question first only where the challenge to the arbitrator’s jurisdiction concerns a question of law alone.”

In Uber, the SCC held that Uber’s standard agreement clause requiring an Ontario Uber driver to pursue arbitration in the Netherlands was unconscionable. The ruling sparked lively debate about its impact on the competence-competence principle, including on this blog. In Uber, the SCC re-affirmed the general competence-competence principle, but created an exception to allow court proceedings where an arbitration clause was unconscionable.

In Kore Meals, to determine whether to stay the proceeding in favour of arbitration in Chicago, the Court applied a five-part test from Haas v Gunasekaram, 2016 ONCA 744. This test is derived from the domestic Arbitration Act, which was found to be, “in effect, the same as the prevailing test” under the ICAA. The Court considered these five questions:

  1. Is there an arbitration agreement?
  2. What is the subject matter of the dispute?
  3. What is the scope of the arbitration agreement?
  4. Does the dispute arguably fall within the scope of the arbitration agreement?
  5. Are there grounds on which the court should refuse to stay the action?

The Court found that the action should not be stayed unless the fifth question is answered in the affirmative – “i.e. unless there is some cogent reason for ignoring the express terms of the arbitration clause.”

The Plaintiff submitted that Chicago was an inappropriate forum because the Defendant merely had a post box and did not carry on business there. The Plaintiff argued that Chicago was an unfair and impractical forum, or a forum non conveniens, because holding a hearing in Chicago would be unnecessarily burdensome and costly for both parties. Instead, Ontario would be the fairest and most logical jurisdiction, especially considering the addition of the non-signatory, Freshii Inc, to the proceeding. The force of these arguments was diminished by the fact that the hearing was being held virtually.

The Defendant countered that the terms of the contract stipulated that the place of arbitration was where the defendants’ business address was located. Further, the Defendant pointed out that the Plaintiff knew that Chicago would be the seat of any arbitration, given the contract’s explicit identification of the Chicago address.

The Court agreed with the Plaintiff that forum non conveniens-type factors can be considered to determine whether the arbitral venue is unfair or impractical. In Ontario, forum non conveniens factors include “the domicile of the parties, the locations of witnesses and of pieces of evidence, parallel proceedings, juridical advantage, the interests of both parties, and the interests of justice”.

The Court nevertheless held that these factors do not apply in the age of Zoom. No location is any more or less convenient than another. Documents are filed digitally, witnesses are examined remotely, and hearings are held via videoconference. Neither location is better for access to justice because “Chicago and Toronto are all on the same cyber street,” meaning that they are equally accessible to both parties. As a result, the law governing “contests of competing forums” is “all but obsolete” and judges “can now say farewell to what was until recently a familiar doctrinal presence in the courthouse.”

 

Analysis & Impact

Competence-competence principle

This case enforces important concepts in Canadian law with respect to the doctrine of competence-competence, as well as the court’s willingness to stay court proceedings in favour of arbitration where parties have contractually agreed to resolve their disputes by arbitration.

Considering forum in stay applications

This case diverges from Canadian jurisprudence by applying forum non conveniens to an application to stay court proceedings in favour of arbitration. In TELUS Communications Inc v Wellman (“Telus“), cited by the Court in this case, the SCC did not engage in a forum non conveniens analysis. Rather, the SCC simply noted that Ontario’s domestic Arbitration Act permits courts to refuse a stay of proceedings in five enumerated circumstances where “it would be either unfair or impractical to refer the matter to arbitration” (Telus, para 65). These five circumstances are the following:

  1. A party entered into the arbitration agreement while under a legal incapacity.
  2. The arbitration agreement is invalid.
  3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
  4. The motion was brought with undue delay.
  5. The matter is a proper one for default or summary judgment.

The SCC’s remarks in Telus about the fairness and practicability concerns underlying these statutory factors to refuse a stay of proceedings did not expand the stay analysis to include factors considered in disputes about the most appropriate forum.

Likewise, in Uber, the SCC found that the arbitration clause was unconscionable, but the exception created in that case was not a forum non conveniens analysis.

In the end, this decision has imported forum non conveniens into the stay analysis while, in the same breath, also finding the doctrine obsolete at least with respect to arbitrations with virtual hearings. In the rare case where a court considers whether an arbitration clause is unconscionable, the physical location of the hearing will likely bear less weight in that analysis. We otherwise expect that this case will be an outlier in applications to stay court proceedings in favour of arbitration. However, the case may have an impact on applications with respect to forum non conveniens in court proceedings.

Have virtual hearings rendered forum non conveniens ‘obsolete’?

Despite the Court’s decision, in jurisdictional motions in Canada, it is not clear that the forum non conveniens doctrine is obsolete even if a virtual hearing is being proposed. Courts may continue to consider factors that will remain unaffected by virtual hearings, for example whether there is a risk of parallel proceedings or where one venue presents a juridical advantage.

Will in-person hearings return?

While virtual hearings have certainly been normalized, we can expect some in-person hearings to resume as pandemic-related restrictions are lifted. Whether a hearing is virtual or in-person in a post-pandemic world will depend on the nuances of each case and the preferences of the parties. Virtual hearings may be more efficient and cost-effective, but may also present challenges in some cases. In essence, practitioners have gained a new tool for their toolbox, with the option of virtual hearings.

In our view, it is a step too far to say that in-person hearings are now obsolete. Virtual hearings have been a function of necessity during the pandemic. While we expect that virtual hearings are here to stay, and provide certain advantages, only time will tell how often and in what circumstances virtual proceedings will be chosen over in-person hearings (or vice versa).

 

*The authors thank Anton Rizor, summer student at Baker McKenzie, for his valuable contributions to this article.

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No Immunity for You: Delhi Court Allows Enforcement of Award Against Afghanistan and Ethiopia

Sat, 2021-08-14 01:48

There has been much debate about immunity this last year. While, most were discussing concepts of “herd immunity” against the novel coronavirus, the Delhi High Court (Court) ventured into and addressed aspects of “sovereign immunity”. In a batch of petitions (KLA Const Technologies v. The Embassy of the Afghanistan and Matrix Global v. Ministry of Education, Ethiopia) a Single-Judge of the Court ruled that foreign States cannot claim “sovereign immunity” (or related procedural safeguards under the Civil Procedure Code, 1908 (CPC)) to resist enforcement of awards before Indian courts.

 

Background

In both the cases before the Court, the petitioners (both Indian companies) had entered into contracts with the government/ government entities of Afghanistan and Ethiopia, respectively, for rehabilitation of the embassy premises and for supply and distribution of certain books. Disputes that had arisen between the parties were referred to arbitration seated in India, resulting in arbitral awards in favour of the petitioners.

Both petitioners then approached the Court under Section 36 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) seeking enforcement of the awards against assets of Afghanistan and Ethiopia in India. In what may now appear to be an over-confident move, neither Afghanistan nor Ethiopia appeared in the Court, leaving the Judge to consider the issue without input from the respective respondents.

 

Sovereign Immunity and the Civil Procedure Code

Before turning to the reasoning employed by the Court, it is important to understand how “sovereign immunity” is understood in India. Section 84 of the CPC grants foreign States the right to sue in Indian courts “provided that the object of the suit is to enforce private rights”. As a corollary, Section 86 of the CPC also provides for foreign States to be sued in India, provided the Central Government of India consents thereto. Section 86(3) in particular provides that: “Except with the consent of the Central Government, certified in writing by a Secretary to that Government, no decree shall be executed against the property of a foreign State”.

The requirement to seek prior consent of the Central Government has however been limited in its scope, with Indian courts holding that they would only be strictly applicable to proceedings which may be categorised as “suits” under the CPC and would not be applicable, for instance, to initiate insolvency suits (see AIR 1940 Cal 244), probate proceedings (see AIR 1956 Bom 45) or to labour disputes (see AIR 1963 Raj 22).

It also bears mentioning that the Indian courts initially viewed the procedural safeguards in Section 86, CPC to be exhaustive of claims to sovereign immunity, de hors applicable international law on the issue. For instance, Mirza Ali Akbar Kashani (1965) the Supreme Court held that:

just as an independent sovereign State may statutorily provide for its own rights and liabilities to sue and be sued, so can it provide for rights and liabilities of foreign States to sue and be sued in its municipal courts” (Para 29).

In other words, in Mirza the Supreme Court held that a plea of sovereign immunity raised in Indian courts are to be resolved entirely as a matter of Indian law. It was, therefore, the Central Government’s prerogative to decide if a foreign State should be sued in India. However, its more recent judgement, Ethiopian Airlines v. Ganesh Narain Saboo (2011), illustrated a different approach to the issue by observing that:

Section 86 does not supplant the relevant doctrine under the international law. Rather, Section 86 “creates another exception” to immunity (emphasis added), in addition to those exceptions recognised under the international law”. (Para 77)

Resultantly, the defence of sovereign immunity in India represents both a procedural right (i.e. requiring prior consent of the Central Government) and a substantive right (governed largely by common law and international law recognizing diplomatic privileges afforded to States).

 

Are Award-Related Enforcement Proceedings “Suits”?

So far as the procedural rights of a foreign State in relation to civil claims are concerned, the Supreme Court in Nawab Usman Ali Khan’s case (1965) held that:

A proceeding which does not commence with a plaint or petition in the nature of plaint, or where the claim is not in respect of dispute ordinarily triable in a civil court, would prima facie not be regarded as falling within Section 86, Code of Civil Procedure”.

The judgement in Nawab Usman’s case, albeit in the context of a former ruler of a princely state of India who was no longer sovereign, clarified that no prior consent under Section 86, CPC was necessary to initiate arbitration against a foreign State or for arbitral awards to be rendered as decrees. However, having been rendered as decrees under Section 14/ 17 of the 1940 Act, their enforcement would nonetheless have been subject to Section 86(3) (reproduced above).

In this respect, it may be noted (as previously discussed on this blog) that Section 36 of the Arbitration Act made a significant departure from the 1940 Act by providing that arbitral awards may be enforced “as if it were a decree of the court”. In this context the Supreme Court clarified in Paramjeet Singh Patheja (2006):

The words ‘as if’ demonstrate that award and decree or order are two different things. […] The fiction is not intended to make it a decree for all purposes under all statutes, whether State or Central”. (Para 42)

 

Decision of the Court

The Court has rightly drawn from the judgement in Paramajeet Singh Patheja to hold that there exists a conceptual difference between a decree simpliciter and an arbitral award, which only for the purpose of being enforced made be treated at par with a decree of a court. With this, the Court has unequivocally held that no prior consent of the Central Government under Section 86, CPC was necessary for the petitioners to pursue enforcement of their respective arbitral awards against Afghanistan and Ethiopia. Not only does this permit enforcement against foreign States without the intervention of the Central Government, in practical terms this greatly augments the speed of enforcement of such awards.

As regard the substantive aspect of sovereign immunity, the Court drew from previous judgements of Indian courts where foreign States were deemed to have waived their sovereign immunity by failing to raise the plea of sovereign immunity promptly or by entering into international conventions which provided for civil liability. Notably, the Court has also drawn from decisions of courts in the United Kingdom and the United States of America which represent the growing international consensus that State actors are to be treated at par with private parties when in their commercial avatar. In fact, the Court has ventured further by holding that:

An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State so as to preclude it from raising a defense against an enforcement action premised upon the principle of Sovereign Immunity”. (Para 47)

On the basis of this reasoning, the Court has directed Afghanistan and Ethiopia to provide an affidavit setting out their assets in India against which the awards can be enforced.

 

Conclusion

Commenting on the difficulties of enforcing arbitral awards in India, the Supreme Court has previously observed that “difficulties of a litigant in India begin when he has obtained a decree”. In this context, the instant decision of the Court will contribute towards undoing some of these difficulties against sovereign counterparties.

The decision of the Court in KLA Const. is noteworthy for its strong reaffirmation that the arbitral process is not comparable to the prosecution of suits in civil courts. The Court has also clarified that the court system only acts in the penumbra of the arbitral process to assist it and to enforce the outcome of such proceedings.

In a world where the contours of “State” are no longer precise and easily discernible, with States directly or indirectly entering into vast commercial relationships, their counter-parties are likely to welcome the Court’s inference that consenting to arbitration shall ipso facto proscribe such a party from thereafter claiming sovereign immunity. It is the authors’ view that the same reasoning is equally applicable to foreign-seated arbitrations, allowing the enforcement of such awards against the concerned State’s Indian assets. Readers may note however, that this reasoning may not find direct applicability in the case of investment arbitration – whose subject-matter may not be exclusively commercial in nature.

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Incorporation of Arbitration Clauses by Reference: Recent Developments in Dubai

Fri, 2021-08-13 01:00

The Dubai Court of Cassation, in its recent judgement, DCC 1308 of 2020, explored the effect of incorporation of arbitration clauses by reference. Typically, “incorporation by reference” refers to parties agreeing to incorporate arbitral clauses found in separate standard-form agreements (“SFAs”) into the agreement between the parties by making reference to the same. Such reference can be specific, where the agreement between the parties refers to the specific clause in the SFA, or general, where the agreement between the parties makes a generic reference to the SFA as a whole without specifying the arbitral clause in particular. The Court of Cassation in DCC 1308 of 2020 held that parties might not necessarily be bound by arbitration clauses incorporated through general reference.

Very few debates in the legal field cut across international jurisprudence in the way as discussions regarding the validity and binding nature of arbitration agreements incorporated by reference. The reasons are clear: in a construction contract for example, parties generally agree to SFAs (such as FIDIC, AIA, etc.) with certain specific modifications. The preference for adopting pre-existing SFAs in a specialized and high contract volume industry is understandable. Such documents have a few distinct advantages, in that they allow parties a sense of fairness and to save time which they otherwise would spend negotiating the contract.

As discussed by the Court of Cassation in DCC 1308 of 2020 and stated above, this practice of adopting pre-existing SFAs also extends to arbitration clauses found in such agreements. Parties agreeing to such arbitration agreements can be certain that a wider gamut of possible disputes would be covered, and that there would be a deemed acceptance of the arbitration clause. Naturally, with incorporation of arbitration clauses through reference to standard form agreements, questions pertaining to validity are bound to arise, especially when truant parties would like to derail the process.

 

The First Instance Judgment

The dispute related to construction works for 5 villas in Dubai. The parties (respectively, the Employer and the Contractor) had executed an agreement for the said construction works and had made a general reference to incorporate the terms of the 1987 FIDIC Red Book General Conditions of Contract (“FIDIC Red Book”). The FIDIC Red Book is one of the agreements in the suite of FIDIC documents, which governs different aspects of construction agreements. Clause 67 of the FIDIC Red Book provides a detailed and multi-step dispute resolution process, requiring that all disputes must first be referred to the project Engineer, and if the parties unable to resolve the dispute in that forum, they may then proceed to arbitration under the ICC rules.

The Employer sued the Contractor before the Court of First Instance, Dubai, for over AED 41 million, and VAT and interest. The Contractor objected to the Court of First Instance’s jurisdiction by virtue of an arbitration clause present in the abovementioned FIDIC Red Book which was incorporated by reference through a signed agreement between the parties.

This objection was rejected by the Court of First Instance. The Court held that the arbitration clause did not impact the court’s jurisdiction. The Court of First Instance held that because there was no specific reference to the FIDIC Red Book arbitration clause in the signed contract between the parties, the agreement between the parties did not contain a valid arbitration clause.  It took the position that an arbitration clause contained in another document can be incorporated by reference only through a specific reference to that clause. According to the Court of First Instance, it was necessary that the consent to arbitrate seem obvious from a review of the contract. Unlike a clause concerning arbitration, which the Court of First Instance described as an “exceptional clause”, general terms contained in schedules and annexures could be incorporated by general reference.

 

The Court of Appeal Decision

Aggrieved, the Contractor approached the Court of Appeal, Dubai. The Court of Appeal disagreed with the Court of First Instance and set aside its decision. It held that the arbitration clause was validly incorporated by reference: a general reference to the FIDIC Red Book was sufficient to incorporate a valid and binding arbitration agreement between the parties.

 

The Court of Cassation Decision

The Employer then applied to the Court of Cassation, which overturned the Court of Appeal’s decision, holding that a mere general reference would be insufficient to prove that the parties were explicitly aware of the existence of an arbitration agreement. The Court of Cassation upheld the reasoning of the Court of First Instance.

 

Comparative Analysis

Because arbitration requires the consent of the parties, the debate around incorporation of arbitration agreement through reference is also an interesting insight into one of the central pillars of arbitration: party autonomy. A final, credible challenge to the incorporation of arbitration clauses through reference depends on the interpretation of the scope of the parties’ consent to have their disputes resolved through arbitration instead of local courts. It is important to ascertain by looking at national laws whether, in case of incorporation of an arbitration agreement by reference, a specific reference would be required for a valid and binding arbitration agreement under the New York Convention.

It is interesting to note that the national courts in the UAE have been consistent in their view that, since resolving disputes through arbitration deprives parties access to local courts, arbitration agreements are to be treated as “exceptional arrangements” and, as such, must be clearly drafted. Therefore, parties are generally encouraged to take preemptive steps so as to avoid a situation wherein the arbitration agreement incorporated through general reference is void.

Article II (1) of the New York Convention 1958 (“New York Convention”) simply requires Contracting States to recognize an agreement in writing as an agreement to arbitrate. The requirement itself is easy to understand; there is no other method of proving a conclusive arbitral agreement. The UNCITRAL Model Law also does not require a specific reference to the arbitration clause, and a general reference is sufficient. The only requirement of Article 7(2) of the UNCITRAL Model Law is that the contract is in writing and the reference is such as to make that clause part of the contract: see Fouchard Galliard Goldman on International Commercial Arbitration.

The international experience differs across jurisdictions. For example, in Psichikon Compania Naviera Panama v. SIER (see footnote 176 of Fouchard Galliard Goldman on International Commercial Arbitration), the French Court of Appeal, owing to a lack of a clear reference, held that the arbitration clause had not been firmly accepted by the other parties. Similarly, the Italian Court of Cassation has underlined the necessity of establishing party consent to adjudicate disputes through arbitration. The Court held that parties had to have knowledge of the arbitration agreement through specific reference to it in the main agreement.

German courts have taken a view that consent may be construed to be implied from relevant international trade usages and conventions, especially when such contracts are widely and typically used in the industry in question, and where such parties have been previously active in the relevant business. A United States court also upheld an arbitration agreement incorporated through general reference to another agreement. The Court stated that parties had “tacitly” agreed to the general terms of the document to which they had referred. This was despite the fact that the plaintiff had never been in possession of those general terms. The Indian Supreme Court has also upheld a printed arbitration agreement annexed to a bill of lading.

In view of the above comparative analysis, it can be concluded that while jurisdictions such as the UAE and Italy place importance on “party consent” while deciding the validity of an arbitration agreement incorporated by reference, it is equally important to recognize practical realities such as the fact that parties involved in such construction agreements are usually active in the industry and are aware of the industry’s general practices, as recognized by German and Indian courts.

 

Conclusion

According to the authors, excessive emphasis on the form by courts in the UAE is antithetical to the concept of party autonomy. Most construction contracts are entered into between sophisticated parties who are well aware of how the detailed suites of contracts work. The argument that a specific reference is required to demonstrate knowledge and, consequently, consent, seems out of sync with the commercial realities of the time. That being said, given the fact that debate over this issue can easily be resolved at the time of drafting, it is essential that commercial parties focus on the arbitration clause whilst negotiating their overall contractual agreements, ensuring that the arbitration agreement is drafted in clear and unequivocal terms.

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CPTPP and ISDS: Three Years On

Thu, 2021-08-12 01:22

On 2 June 2021, the British government announced that the existing 11 signatories (the “Parties”) to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) have agreed to the United Kingdom’s bid to begin the accession process.1)The signatories consist of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. jQuery('#footnote_plugin_tooltip_38148_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38148_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); International Trade Secretary, Liz Truss, commented that “CPTTP membership…will help shift our economic centre of gravity away from Europe towards faster-growing parts of the world, and deepen our access to massive consumer markets in the Asia-Pacific…without having to cede control of our borders, money or laws.” The optimism can hardly be said to be unwarranted when one considers the economic impact, given that the gross population of the CPTPP markets exceeds those of the United States and the EU.

However, the question of the CPTPP’s legal impact remains open, especially with regard to the Investor-State Dispute Settlement (“ISDS”) provisions under Section 9B of Chapter 9 of the CPTPP’s legal text.

This article sets out an overview of the CPTPP and its ISDS provisions and comments on the future of the CPTPP.

 

Overview of the CPTPP

The CPTPP, which developed from the Trans-Pacific Partnership’s (“TPP”) failure to enter into force after the United States withdrew in January 2017, is one of the world’s largest free-trade agreements. With a combined GDP of approximately $13.5 trillion, it has been projected to raise $147 billion in annual global income.

The legal text retains two-thirds of the TPP’s provisions, suspending or changing 22 provisions that were primarily favored by the United States. The legal text has to be read together with the relevant side letters, which are bilateral arrangements between specific Parties. Although the use of side letters is not unique to the CPTPP (see, for example, the ASEAN-Australia-New Zealand Free Trade Area (“AANZFTA”) and the United States-Mexico-Canada Agreement (“USMCA”)), the extensiveness of its use is noteworthy: New Zealand (25); Canada (40); Australia (21); and Vietnam (35).

Administratively, Chapter 27 provides for the formation and functions of a TPP Commission composed of government representatives of each Party (the “Commission”). Since the CPTPP’s entry into force on 30 December 2018, the Commission has met at least once a year to endorse various decisions.

 

Overview of the CPTPP’s ISDS Provisions

ISDS is provided under Section 9B of Chapter 9, where a multi-tiered dispute resolution mechanism is set out.

Prior to commencing arbitration, the claimant is required to serve “a written request for consultations setting out a brief description of facts regarding the measure or measures at issue” (Article 9.18.2). Disputing Parties are then required to engage in consultations and negotiations for six months from the respondent’s receipt of the claimant’s written request for consultations (Article 9.19.1). The claimant is also required to serve a written notice of intent to submit a claim to arbitration containing specified details on the respondent 90 days before submitting a claim to arbitration (Article 9.19.3). The said written notice must be accompanied by a written waiver “of any right to initiate or continue before any court or administrative tribunal under the law of a Party, or any other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 9.19” (Article 9.21.2(b)).

Arbitration may be commenced in accordance with any of the following regimes: ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings; the ICSID Additional Facility Rules; the UNCITRAL Arbitration Rules; or, any other arbitral institution or arbitration rules that the claimant and respondent agree on (Article 9.19.4). The arbitration must be commenced within three years and six months from the date on which the investor first acquired, or should have first acquired, knowledge of the breach (Article 9.21.1).

At the Commission’s first meeting on 19 January 2019 in Tokyo, it endorsed a decision on ISDS Code of Conduct per Article 9.22.6. Of note is paragraph 3(d) of the Annex that provides as a governing principle that “Upon selection, an arbitrator shall refrain, for the duration of the proceeding, from acting as counsel or party-appointed expert or witness in any pending or new investment dispute under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or any other international agreement.” The restriction is particularly broad. It covers other disputes that the claimant and respondent are uninvolved in.

Parties are entitled to bring a claim based on the actionable breaches of obligations under Section 9A in respect of a “covered investment,” that is given a broad definition under Article 9.1, save for “judgment entered in a judicial or administrative action.”

Where the respondent Party is Chile, Mexico, Peru, or Vietnam, the claimant must elect between litigation in the court or administrative tribunal of those parties or arbitration in accordance with Section 9B. The election shall be definitive and exclusive (Annex 9-J).

In addition, New Zealand has signed side letters with Australia, Peru, Brunei, Malaysia, and Vietnam to exclude the direct application of ISDS provisions under Section 9B. With regard to New Zealand vis-à-vis Australia and Peru, no Australian and Peruvian investors, in relation to New Zealand, “shall [not] have recourse to dispute settlement…under Chapter 9, Section B (Investor-State Dispute Settlement) of the Agreement,” and vice-versa. As regards New Zealand vis-à-vis Brunei, Malaysia, and Vietnam, any dispute between an investor and the respondent State that would otherwise be subject to ISDS under Section 9B of Chapter 9 must comply with a procedure similar to the first tier of Section 9B’s multi-tiered dispute resolution clause for six months. For the second tier (commencement of arbitration) to operate, the respondent State must consent to the application of Chapter 9 to the dispute. In the case of Vietnam, specific consent by the respondent State is required.

Although there is no official explanation on the requirements of specific consent, it is worth noting that the side letters between New Zealand and Vietnam also contain a provision stating that “nothing in this side letter shall derogate from the rights and obligations of the Parties under any existing international agreements to which Parties are party”—these agreements include the AANZFTA Agreement, under which both parties have recourse to ISDS per Article 20 of Chapter 11. Hence, it is plausible that specific consent was intended to circumscribe arbitrations under the CPTPP’s ISDS regime in light of other international agreements.

 

The Future of ISDS under the CPTPP

As illustrated by New Zealand’s side letters, the ISDS provision is not written in stone. Parties are free to augment its applicability.

Already we see a recent trend of States moving away from ISDS. In the USMCA that succeeds the North American Free Trade Agreement, Canada is notably absent from Chapter 14 on ISDS. (See definition of “Annex Party” in Annex 14-D of Chapter 14). The EU is looking to reform existing ISDS mechanisms through the creation of a multilateral investment court to preside over disputes arising from future bilateral EU investment agreements. The Regional Comprehensive Economic Partnership (“RCEP”) that is currently the world’s largest FTA excludes any ISDS dispute settlement mechanism under Chapter 10 that deals with investments. In addition, the Biden administration has made clear that the United States would not be returning to the CPTPP anytime soon.

In light of this, it appears that the weight of preserving support for ISDS has fallen chiefly on the shoulders of Japan, given the strong support by its business community for ISDS. However, in the face of New Zealand and Australia’s notable opposition to ISDS, Japan’s influence alone may not be sufficient in promoting and sustaining the current regime for ISDS. The fact remains that to date, there has been no reported case of a claim commenced under the CPTPP’s ISDS regime could reflect its lack of popularity.

Consequently, the most immediate indicator of continued support for ISDS in the CPTPP may be revealed in the outcome of United Kingdom’s accession process. According to the Commission’s endorsed decision regarding Accession Process of the CPTPP on 9 January 2019, an Accession Working Group will be establishedto negotiate the accession of the aspirant economy” (para. 2.3, Annex to CPTPP). At the first meeting with the Accession Working Group, the United Kingdom will have to “identify any additional changes it will need to make to its domestic laws and regulations, in order to comply with the obligations of the CPTPP” (id. para. 3.3). It is likely that the subject of ISDS will be one of the important issues given that ISDS featured significantly with mixed views in the United Kingdom’s Department for International Trade’s public consultation on potential United Kingdom’s accession to the CPTPP.

The outcome of the United Kingdom’s negotiations on ISDS is difficult to forecast. On the one hand, the United Kingdom has shown signs that it is willing to exclude ISDS as seen in its in-principle agreement with Australia that the investment chapter in the United Kingdom-Australia FTA will not include an ISDS mechanism. On the other hand, when Minister of State for Trade Policy, Greg Hands was asked in the House of Commons in late May, on whether the government could rule out the inclusion of ISDS in the CPTPP, he stated that “It is a live negotiation, and there will be a chapter on investment…We are huge investors in each other’s markets, and…that the UK has never lost an ISDS case.”

One of the main pushbacks against ISDS has been its use by private companies to sue States for the impacts of public policies that result in limiting profit margins. In this regard, the recent release of the new Canadian Foreign Investment Promotion and Protection Agreement Model on 13 May 2021 reflects a shift from older investment and trade treaties that focused primarily on achieving economic prosperity, to a “new” generation of treaties that tend to provide comprehensive frameworks that reflect national (and international) agendas for promoting sustainable development, corporate social responsibility, and human rights, while also expressly addressing how this may interact with the interests of private businesses.

The CPTPP’s ISDS regime has not fallen behind in this regard. In respect of claims under the CPTPP’s ISDS regime, Article 9.16 provides a safeguard for States “to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” Article 9.17 contains an affirmation by States to encourage enterprises operating in their territories “to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility” that the respective State endorses or supports. These provisions may soften the negative image of ISDS in the sphere of public opinion over the course of accession negotiations.

If the United Kingdom follows in New Zealand’s footsteps and negotiates side letters to waive investors’ recourse to ISDS, this might pave the way for other potential applicants like the Philippines and Taiwan to follow suit in future negotiations, although one should be cautious in being too quick to pronounce the end of ISDS. As mentioned in the previous section, States obligations under the CPTPP are part of a wider network of international trade agreements. The lack of uptake of ISDS under the CPTPP could simply reflect an aversion of States against opening themselves up to claims on multiple fronts as opposed to a definitive end to ISDS.

References[+]

References ↑1 The signatories consist of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. function footnote_expand_reference_container_38148_30() { jQuery('#footnote_references_container_38148_30').show(); jQuery('#footnote_reference_container_collapse_button_38148_30').text('−'); } function footnote_collapse_reference_container_38148_30() { jQuery('#footnote_references_container_38148_30').hide(); jQuery('#footnote_reference_container_collapse_button_38148_30').text('+'); } function footnote_expand_collapse_reference_container_38148_30() { if (jQuery('#footnote_references_container_38148_30').is(':hidden')) { footnote_expand_reference_container_38148_30(); } else { footnote_collapse_reference_container_38148_30(); } } function footnote_moveToReference_38148_30(p_str_TargetID) { footnote_expand_reference_container_38148_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38148_30(p_str_TargetID) { footnote_expand_reference_container_38148_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Can You Have Your Cake and Eat It Too? Unilateral Appointments in Indian Arbitration

Wed, 2021-08-11 01:00

This blog has previously discussed the illegality of unilateral appointments of sole arbitrators in India. However, a good beginning is only half the battle won.  Before one dwells further, it is important to gauge the Indian position on unilateral appointments.  First, as stated in TRF Ltd. v. Energo Engineering (“TRF”), if the nominated arbitrator is barred from presiding such arbitration under Section 12(5) read with Schedule 7 of the Arbitration and Conciliation Act, 1996 (“Act”), by extension of his inability, his nomination for a replacement is invalid under the law. The invalidity stems from the fact that such an arbitrator would have an interest in the outcome of the proceedings and his nomination could be biased. Second, as upheld in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (“Perkins”), even if the person authorised to nominate is not an arbitrator himself, his interest in the outcome of the dispute would invalidate an appointment made by him. Essentially, both judgments bar one party from having the exclusive power to appoint the arbitrators.

Be that as it may, several arbitration agreements now stipulate an alternative that is equally lopsided but does not prima facie fall afoul of the grounds stated in Schedule 7 or the ratio decidendi of TRF and Perkins. Such arbitration agreements allow one party originally disqualified to directly nominate an arbitrator (because of his interest in the dispute) to provide an exhaustive list of names from which the other party would have to select an arbitrator. In December 2020, the Supreme Court of India (“SC”) in Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) (“Railway Electrification”) ruled on the validity of such appointments. Can such a guise of autonomy be enough or does the current jurisprudence bar any and all appointments where the power of appointments is not evenly balanced?  Expanding on the issues dealt with by the SC, this post aims to critically examine the judgment and its reasoning.

 

Facts and Judgment

In this case, the Railway Board (“Board”) invoked the arbitration agreement they had signed with the contractor. The contractor did not comply with the terms of the appointment in the arbitration clause and petitioned the High Court (“HC”) seeking the appointment of an arbitrator. To put things into perspective, the arbitration agreement in their contract empowered the General Manager (“GM”) of the Board to identify a roster of four serving railway electrification officers from which the contractor could nominate candidates for a sole arbitrator. The contractor would be required to nominate two candidates from this panel and thereafter, the GM would be bound to pick at least one of the nominees to act as an arbitrator. Further, the clause entitled the GM to appoint the remaining arbitrators and indicate the Presiding Officer. The contractor argued that the contract does not make way for the appointment of a neutral arbitrator while the Board argued that the arbitrator was to be appointed as per the terms of their contract. The HC rejected the Board’s argument and exercised its right to appoint an arbitrator. Aggrieved, the Board challenged the appointment before the SC.

The SC overturned the HC’s decision and held that the power of the Board to nominate members was counter-balanced by the power of the contractor to select two names from the suggested panel. The SC also noted its decision in Perkins, which stated that“…where both the parties could nominate respective arbitrators of their choice…whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party…” The SC countered the contractor’s reference to TRF by stating that the judgment had noted that “…when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation.” and thus, remained inapplicable in this case.

 

Analysis

An arbitrator essentially acts as a judge when it comes to arbitration proceedings. Due to the nature of his role as an adjudicator, it is important that he remains independent of both parties, and thereby, thoroughly impartial. As per 12(5) of the Act, any person whose relationship falls under categories stipulated in Schedule 7 of the Act is legally disentitled from being appointed as an arbitrator. Schedule 7 prohibits an employee, consultant, or advisor to one of the parties from acting as an arbitrator. Thus, the GM of the Board, who has been empowered to select a panel of arbitrators by the Board, is himself disqualified from acting as an arbitrator under Section 12(5) of the Act.

At this juncture, it is important to refer to the SC’s judgment in Pratapchand Nopaji v. Kotrike Venkata Setty & Sons which upheld the validity of the maxim ‘qui facit per alium facit per se’ in the Indian context. In other words, the SC upheld that it is impermissible in law for one to do through others what one is statutorily ineligible to do himself. Therefore, as an extension of the GM’s incapacity under Section 12(5) of the Act to act as arbitrator, any appointment under his control is tainted with illegality. This is rational because the GM is an interested party, and hence, his ability to unilaterally dictate the composition of the panel essentially results in one party completely charting the course of the dispute resolution process. However, in the aforementioned case, the SC held that the GM’s power was countervailed by the contractor’s right to pick two arbitrators from the panel selected by the former. In the author’s opinion, the right to pick from a list curated by someone who has an interest in the outcome of the dispute is merely Hobson’s choice. The fact that not even one of the arbitrators on the panel could be outside the scope of the Board’s influence raises serious concerns over the possibility of bias and the fairness in the procedure and outcome of the proceedings.

Furthermore, the reliance on excerpts from TRF and Perkins to justify the appointments was devoid of context. In TRF, the SC held that when both parties have the right to nominate their respective arbitrators, the same was unmistakably different from unilateral appointments. Thereafter, in Perkins, the SC adduced a reason to its conclusion in TRF. The SC said that the rationale behind the same was that the party’s powers to nominate an arbitrator could be counter-balanced by the other party’s power to do the same. Objectively, both propositions envisage a situation where both parties have an equal bargaining ground with each having the power to appoint arbitrators independently of the other. By contrast, in Railway Electrification both the parties are not placed equally in the selection process, nor could the contractor elect its respective arbitrator without the Board’s influence. It is inconceivable to think that the Board’s power to elect its own arbitrators, elect the President of the tribunal, and also to curate the panel of arbitrators could be counteracted merely by the contractor’s right to pick an arbitrator from the roster. Thus, the propositions put forth in TRF and Perkins deal with a different scenario and cannot be used to justify the lopsided allocation of power where one party can only pick from a panel of arbitrators proposed by the other.  Conflating the two is unfounded and falls wide off the mark.

Having said that, it is important to review such conclusions against the touchstone of party autonomy. When the arbitration agreement tilts in favour of one of the parties, the issue boils down to the thin line between procedural impropriety and party autonomy. In this regard, one can refer to the 246th Law Commission Report for clarity. The Report provides: “the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties.” Thus, party autonomy reigns supreme when it comes to arbitration, however, this power cannot be exercised at the expense of basic considerations of impartiality and independence. In sum, an arbitration agreement cannot make way for a proceeding that prescribes a semblance of a fair procedure regardless of it being biased and against the principles of natural justice.

 

Concluding Remarks 

In December 2020, the SC’s faulty reasoning in Railway Electrification found support in the Delhi High Court (“DHC”) judgment of M/s Iworld Business Solutions Private Limited vs M/s Delhi Metro Rail Corporation Limited as the DHC deemed that the appointment of an arbitrator selected through an exhaustive roster forwarded by one party to the other was legal. The principal civil court held that by no stretch of the imagination could the impartiality of such a panel be brought to question. However, if Indian courts continue to allow such appointments where one party is allowed to exercise an exclusive right to panel selection, the Indian arbitration landscape will be severely affected. No sensible/reasonable law should allow such blatant violations of independence and impartiality. In fact, courts in India are bound by Section 18 of the Act which mandates equal treatment of both parties and stipulates that both parties should be given full opportunity to present their case. Thus, if one party is allowed to take advantage of such loopholes in the law and circumvent the limitations placed by Schedule 7, the entire objective of Section 18 is defeated.

The Railway Electrification case is currently under consideration and the Hon’ble Chief Justice of the SC has been requested to constitute a larger bench to probe into the correctness the judgment. In order to nip such unequal panel formation in the bud, the SC needs to assess the correctness of Railway Electrification at the earliest.

 

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Analysis of Environmental Dispute Resolution Mechanisms in the EU-UK Trade Deal

Tue, 2021-08-10 01:27

In December 2020, the EU and UK concluded the negotiations of the  Trade and Cooperation Agreement (TCA). This Agreement is a crucial step towards maintaining a long-standing relationship between the EU and the UK. One of the principal goals of the TCA is to achieve climate neutrality by 2050; with this objective, the treaty establishes environmental protection standards. These include non-regression provisions, rebalancing mechanisms, and dispute settlement mechanisms, among others. While the inclusion of such provisions is to be celebrated, several loopholes in the TCA may prevent them from achieving the desired results. This post analyses the loopholes in the enforcement mechanism, the requirement that any measure impacts on trade and investment  for it to constitute a violation of the environmental rules, and the possibility of third-party participation in environmental disputes.

Enforcement Mechanisms

In the TCA, environmental matters are included in Chapter 7 and are categorized as essential elements. If a party infringes them, it may lead to suspension of the treaty regime; thus, implying that the States have given substantial weight to environmental concerns.

In case of potentially serious environmental damage, the agreement provides for safeguard measures, which can be unilaterally applied by the parties (Article 773), after initial consultations between them. Where the applied safeguard creates an imbalance, the counterparty can adopt appropriate rebalancing measures, and if there is any issue regarding safeguard measures, that party may then resort to arbitration procedures. However, there is no provision for an expedited proceeding to prevent imminent damage to the environment. Rather, the standard six-month arbitration procedure will be applied (Article 739).

In this regard, in comparison to the provisions of the TCA, other treaties such as UNCLOS or the PCA Environmental Rules, expressly empower the arbitral tribunal to take provisional measures in ongoing proceedings. These measures are an expeditious remedy to restrict the infringing party from causing irreparable harm to the environment.

In addition, the EU has recognized that the lack of evidence and data, and the insufficient powers vested in enforcement bodies are factors holding back the implementation and compliance of environmental standards. The TCA could have bridged these gaps by vesting arbitrators and/or panels of experts with the power to subpoena. The ability to subpoena is essential for verifying party disclosures and validating the accuracy of information and evidence. Had this power been vested in dispute resolution bodies under the TCA, they could access essential scientific information and achieve a full discovery of facts, which is crucial for dispute resolution bodies to rule in environmental cases and, in this sense, to further environmental protection.

The Requirement that a Measure Impact “Trade and Investment” as a Pre-requisite for Violation of the TCA’s Environmental Rules

Article 391 of the TCA contains the so-called, “non-regression clause”, which determines that parties can refer disputes to expert panels only in cases where the non-compliance of environmental standards “affect trade or investment.Environmentalists have observed that adducing evidence which meets this threshold of “affecting trade” is difficult to prove. For instance, Professor Barnard explains that “single changes in the legislation may not impact trade, which will make difficult to trigger the threshold of violation.” This also leaves uncertainty and ambiguity as to what is considered a grave enough impact on trade for a party to be able to raise a dispute under the TCA.

Additionally, while the TCA mostly regulates trade among the parties, there is a strong environmental cooperation component as outlined in section 7 of the Preamble. However, the treaty contains no remedial procedure for a panel of experts to settle environmental disputes which are unrelated to trade and investment, and thus a vital area has been left uncovered from an adjudicatory mechanism. The narrow scope of the regression clause, limited to disputes that “affect trade”, has also been criticised by the Institute for Public Policy Research, which suggests that the non-regression principle should apply to all circumstances and that the contravention of environmental legislation should be sufficient to hold a party liable, regardless of whether a measure affects trade and investment.

Similarly, Article 411 on rebalancing measures allows parties to take countermeasures in response to acts of the other party that have a “material impact on trade and investment”, where such measures can cause “significant divergences”. The phrase “material impact” is defined as a threshold entailing “reliable evidence [of impact] and not a remote possibility”, which means that the party is required to present well-grounded, convincing evidence of the alleged “material impact”. Further, the requirement of “significant divergences” implies that the party must evince more than one severe discrepancy. This criterion leaves room only for grievous breaches, and the parties will often be unable to meet such a high standard of proof. This also allows member states to deviate from furthering environmental protection while only complying with the bare minimum standards.

This position is analogous to that in the Trail Smelter judgment, where the party had to show “materialized damage” and follow a “de minimis” rule. Such approaches discourage legal actions where the impact of the breach is negligible. Thus, parties can only apply rebalancing measures where there is clear and significant evidence of environmental damage and not mere minor damages.

Contrary to the above, jurists such as Medes Malaihollo have noted that it is difficult for parties to present evidence of actual materialized damage. In the same line, in Ireland v UK and New Zeeland v Japan, both adjudicative bodies held that the potential or foreseeable risk of harm, rather than material damage, was sufficient to hold a party liable for the breach of their duty of care under the precautionary principle. This is a reasonable threshold that does not defer to the tribunal to decide which measures are appropriate in the absence of material evidence, thus, preventing environmental degradation.

Finally, it is essential to adopt the precautionary principle for broadening the bar to accommodate non-trade environmental disputes under the TCA. This approach is crucial as the rebalancing mechanism only allows parties to seek arbitration proceedings due to significant deviations in environmental standards, which are extremely limited. A study conducted by IPPR indicates that arbitral tribunals will settle environmental issues in rare cases under the current threshold. Adopting the precautionary principle will provide parties standing to raise environmental disputes under the TCA as both potential risks and materialized evidence will be actionable under this threshold.

Civil Society Participation in Environmental Disputes

It is widely known that civil society actors play a pivotal role in ensuring transparency, protecting public interests, and efficiency in environmental disputes. Their participation in dispute resolution mechanisms is quintessential. On this matter, the TCA allows arbitral tribunals (not expert panels) to accept amicus curiae submissions but only permits limited participation through written submissions. Further, the parties are permitted to receive information through expert advice or domestic advisory groups (DAGs).

Under the current provisions, amicus curiae submissions do not ensure the active participation of third parties, such as might be achieved by providing them with access to documents or oral arguments. Additionally, studies have shown that DAGs are not entirely representative of all the interests in environmental disputes. The disadvantaged and regional minorities are not part of these groups most of the time. In this vein, states should adopt internal legislation to ensure the meaningful participation of all groups.

On the contrary, the Trans-Pacific Partnership Agreement vests substantive powers to civil society by allowing access to documents and making oral arguments in initial and appeal proceedings. Further, UNCITRAL’s Working Group III has acknowledged that several actors who have direct interests in investor-State disputes should be included through joinder or intervention to have an opportunity to protect their rights. In this respect, States could adopt similar policies for DAGs to represent the interests of all the actors of civil society in TCA disputes.

Finally, under the TCA, arbitral tribunals are vested with plenary powers to accept or reject submissions from third parties. This makes it necessary to establish a detailed standard to carry out this process to avoid consistency and transparency concerns. For instance, the TCA could incorporate similar criteria to the ones outlined in Article 37 of  the ICSID Convention, where tribunals are able to consider whether a submission brings any novel perspective to the existing arguments or consider the inclination of submitted amicus curiae.

Conclusion

The TCA has endeavored to create a stringent dispute resolution mechanism for resolving environmental disputes. However, some loopholes still need to be addressed to achieve the desired goal of environmental protection. Primarily, it is significant that parties have standing to resolve environmental disputes that are not restricted by the narrow interpretation of the non-regression and rebalancing clauses. This will deter the parties from deviating from protection standards and will provide room for adequate legal review. Secondly, third-party oral intervention and joinder of third parties should be permitted to provide transparency and to ensure a broad representation of all interests. Finally, tribunals should have powers to subpoena and to order interim measures to ensure that the treaty has effective enforcement mechanisms.

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Time for Class Action Arbitrations in Korea?

Mon, 2021-08-09 01:00

In a class action lawsuit, a plaintiff or group of plaintiffs bring claims on behalf of similarly situated individuals. The legislatures in some civil law countries including Korea, have recently proposed or implemented measures allowing or expanding the use of class actions in their court systems.

Considering that Korea currently does not have in place the framework or rules for class arbitrations, introducing class actions in the Korean courts could encourage and provide a legal basis for permitting class action arbitrations in Korea.

 

Recent Development of Class Actions in Korea

Currently, class actions are available in Korea only for securities related cases. However, in September 2020, the Korean government proposed a bill (the “Bill”) that would allow a plaintiff to initiate a class action in any area of law. Further, class action lawsuits in Korea currently have stringent requirements, such as the requirement that the class representative shall be the person with the greatest economic interest in the outcome, which render it arguably difficult to file a class action lawsuit.

The Bill, if passed as a legislative act (“Act”), is expected to loosen up several requirements for filing of class action lawsuits, which includes key proposed provisions such as: (1) easing of requirements on class and class representatives; (2) expansion of venues which permits class action claims to be brought before a district court under a high court with jurisdiction over one of the defendants, and not only before the district court with jurisdiction over one of the defendants; (3) introduction of pre-litigation discovery; and (4) permission of jury trials.

Significantly, the Act would apply retroactively, thus allowing potential plaintiffs to file class action lawsuits for claims that are filed before the Act to take effect, if they are within the prescriptive period under the statute of limitations. The intent behind this proposal is to expand the availability of class action lawsuits to a wider scope of similarly situated individuals.

While the Act will exclusively apply to court litigation, it begs the question of what impact it would potentially bring to arbitration in Korea, considering that class action arbitrations could likewise provide relief to a larger number of aggrieved parties and fulfill the intent behind the Bill.

The passage of the Bill would perceivably favor the argument for permitting class action arbitrations in Korea.

 

Possible Framework for Class Action Arbitrations in Korea

While the Bill is still in its early stages of implementation, it is now an appropriate juncture to consider its implications for arbitrations given that it will take considerable time to set up the framework for class action arbitrations.

As a first step, the Korean arbitration community may propose arbitration rules tailored to class action arbitrations in Korea. To establish the legal foundation and specific arbitration rules for class action arbitrations, key issues and challenges to be aware of must be identified which may begin by referring to existing rules on class arbitrations.

One example of such framework is the American Arbitration Association (the “AAA”) which administers class arbitrations according to its Supplementary Rules for Class Arbitrations (the “Supplementary Rules”).  According to Article 1 of the Supplementary Rules, they apply where a party submits a dispute to arbitration on behalf of a purported class by supplementing any other applicable AAA rules.  It also contains rules on key topics such as “Class Certification” (Article 4), “Class Determination Award” (Article 5), and “Form and Publication of Awards” (Article 10), all of which will be valuable resources to the Korean arbitration community when it seeks to develop and implement its own class action arbitration rules.

Once the draft class action arbitration rules are put together, the Korean arbitration community may be consulted for comments and suggestions on changes to the proposed class action arbitration rules, especially on arguably the most challenging aspects in any class action arbitration which is class certification where it is often a point of contention as to whether a class should be certified and whether the claimant is an appropriate class representative. Accordingly, the draft class action arbitration rules should provide a list of clear and detailed conditions that the tribunal and parties may consider when determining whether a class should be granted certification.

 

Training and Nurturing

Next, the Korean arbitration community may develop a long-term plan to nurture and train local arbitrators and practitioners to handle class action arbitrations in order to ensure the fair and efficient conduct of class action arbitration proceedings. One consideration may be that arbitrators are required to possess the requisite knowledge and experience to resolve the issues at disputes.

For example, a prerequisite for class action arbitrations is the determination of whether a class can be certified.  This would require the arbitral tribunal to consider (1) numerosity of the class; (2) whether questions of law or fact are common to the class; (3) whether the claims or defenses of the representative parties are typical of the claims or defenses of the class; (4) whether the representative parties will fairly and adequately protect the interests of the class; (5) whether counsel selected to represent the class will fairly and adequately protect the interests of the class; and (6) whether each class member has entered into an agreement containing an arbitration clause that is substantially similar to that signed by the class representative(s) and each of the other class members. 

However, given the inherent complexity of certifying class actions as demonstrated by the abovementioned multifaceted consideration required, it is unlikely that the Korean arbitration community will be equipped with such experienced arbitrators or practitioners at the initial stage.

It is thus inevitable that in the early stages of class action arbitration in Korea, arbitrators and practitioners from other countries who already have relevant experience will probably play key roles in the community. It will likely take several years for Korea to see its first group of local class action arbitrators. A long-term plan to nurture and train class action arbitration arbitrators and practitioners is needed.

 

Conclusion

There is no doubt Korea will rise to the challenge. Korea has swiftly become a dynamic, global economic powerhouse and has arisen as a recognized arbitration hub for parties conducting business in Asia. Once the Act becomes effective and supports the growth of class action arbitrations in Korea, a heightened need and demand for dispute resolution in Korea through class arbitrations would be foreseeable.1)The authors would like to thank Caroline Yoon of Barun Law LLC for her invaluable assistance in the preparation of this article. jQuery('#footnote_plugin_tooltip_38248_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38248_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

References[+]

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Cairn Moves to Seize Air India Assets to Recover Hefty Award against India: Worthwhile Choice or a Futile Exercise?

Sun, 2021-08-08 01:39

In May 2021, Cairn Energy PLC filed a lawsuit before a New York Court to enforce a USD 1.2 billion investor-State arbitral award against India passed by the Permanent Court of Arbitration. It sought, in particular, a proclamation that State-owned entity (SOE), Air India “should be held jointly and severally responsible for India’s debts, including from any judgment resulting from recognition of the award” (Complaint, ¶ 31). A detailed account of the facts of this case can be accessed here.

The protection of States’ assets against enforcement actions has remained an insufficiently explored area of international law, even though the doctrine of sovereign immunity is central to this discourse. This post compares and analyses cases where States have invoked sovereign immunity to resist attachment of assets of SOEs like Air India and the rationale adopted by courts towards piercing the corporate veil to ascertain whether they may be treated as the State’s “alter ego”.

 

Sovereign Immunity and Executing against SOEs

The doctrine of sovereign immunity, emanating from the principles of comity and equality of States, forms an integral part of customary international law in State practice. This doctrine acts as a procedural bar, ensuring that governments remain protected from the burden of defending lawsuits overseas. Its narrow object is to keep properties of States and their representatives immune against enforcement measures in foreign courts.

The United Nations Convention on Jurisdictional Immunities of States and their Property (UNCSI) has been the only sustained endeavour to develop a uniform framework of international guidelines, aiming to provide a comprehensive code for the immunity of State assets. This Convention, however, has only been ratified by 22 States and is awaiting entry into force since 2004. Thus, the lack of a widely-ratified international convention on this topic has resulted in a situation where domestic courts must interpret and determine the issue of immunity by reference to customary international and domestic law, including potential immunity for SOE assets against coercive measures like attachment in execution proceedings.

Precedential Analysis

Although the doctrine of sovereign immunity is adopted by both common and civil law jurisdictions, much inconsistency lies in the treatment of an immunity plea in execution matters.  This has prompted award-creditors to painstakingly select the forum that is most likely to execute an award. Through the years, several attempts have been made by investors (much like Cairn) to satisfy their awards against the State assets located in jurisdictions considered to be “pro-execution”, such as the United States. Thus, this section examines two significant American judgments that may influence the outcome in Cairn’s proceedings. To draw a comparison with how civil law jurisdictions have dealt with similar facts, this section also discusses a prominent and contemporary Dutch case.

In a discussion regarding the separability of State debts from SOEs, the 1983 case First National City Bank (now, Citibank) v. Banco Para el Comercio Exterior de Cuba (“Bancec”) is important. The question was whether Citibank could recover its dues from Cuba by expropriating the assets of Bancec, a known organ of the Cuban government. The US Supreme Court pierced the corporate veil and, in the process, formulated the ‘Bancec factors’ to determine, in effect, whether a corporation was functioning as the wholly-owned instrumentality of a foreign government. The factors were: (1) the extent of the government’s economic control in the entity; (2) whether the government is the beneficiary of the entity’s profit-making; (3) the extent to which government officials manage the daily affairs of the entity; (4) whether the entity’s conduct supplements the government in any way; and (5) whether separating identities from the entity would facilitate the State to avoid obligations in US Courts. These factors were later crystalized in Rubin v. Islamic Republic of Iran. More recently, in the 2019 decision Crystallex International Corporation v. Bolivarian Republic of Venezuela, the Venezuelan government was found to be the real beneficiary of the shares and profits generated from its SOE, Petróleos de Venezuela SA (PDVSA). To adjudicate, the US Court of Appeals for the Third Circuit relied heavily on the Bancec factors while also recognizing that they do not purport to create a ‘mechanical’ formula and should only be applied on a case-by-case basis. Incidentally, in the context of enforcement of awards, the Third Circuit reformulated the Bancec factors as follows: (1) the extensive control prong need not automatically entail a nexus between the aggrieved investor and the entity against which enforcement was sought; (2) a formal principal–agent relationship  was not necessary as a mandatory requirement to establish extensive control; (3) consideration of third-party interests was not a pre-requisite when determining asset attachment; (4) the court cannot adjudicate upon later events but may only rely on the subsisting record while evaluating the status of the entity; (5) the appropriate burden of proof was the ‘preponderance of evidence’, as opposed to a ‘clear and convincing’ standard; and (6) the equitable component in treating one entity as the alter ego of another need not be determined by the court.

Coming to the civil law perspective, Dutch courts follow the General Provisions Act 1829 in matters of sovereign immunity of foreign State properties. Section 13a has enshrined that enforceability (of awards) shall be regulated as per restrictions recognized under international law, thus limiting the jurisdictional powers of national courts. In Anatolie Stati v. Kazakhstan, the Dutch Supreme Court took a strikingly dissimilar stand compared to US Courts in enforcement of the award passed in favour of the claimant. Initially, the Amsterdam Court of Appeal allowed seizure of Kazakhstan’s shareholding in a Dutch company, held through the Kazakh sovereign wealth fund, Samruk-Kazyna. The rationale behind the decision was Samruk’s lack of “factual economic independence” from the sovereign in invoking its legally separate nature, formulating its own policies and digressing from State policies. It was emphatically clarified that due to Samruk’s purpose of incorporation and business being commercial in nature, the shareholding could not be brought within the purview of sovereign immunity. However, the claimant’s victory was short-lived as, in December 2020, the Supreme Court of the Netherlands set aside this decision, adjudging it “erroneous in law” (Judgment, ¶ 3.2.4). In doing so, the apex court demonstrated allegiance to the UNCSI as customary international law, applying its Article 19 as the basis of deciding immunity over foreign States’ assets (elaborated here). Thus, countries like the Netherlands, which shift the onus of proof onto the award-creditor to prove that State assets should be attached or that they do not have a public purpose, have notably dissuaded such parties from approaching these jurisdictions and steered them in the direction of the more favourable American courts.

 

Concluding Remarks

Usually, arbitral awards against States are not enforced against SOEs due to the presumption that corporations have independent identity and operate separately from the sovereign. For instance, recently in a December 2020 ICSID case, the British Virgin Islands High Court was required to determine whether assets belonging to Pakistan International Airlines (PIA) including the iconic Roosevelt Hotel in New York could be attached in settlement of a claim made by Tethyan Copper Co. against the Pakistani government. The court, in its decision, disallowed such attachment on the ground that Tethyan had failed to satisfactorily establish that PIA can be “assimilated into the State for all purposes” (Judgment, ¶ 99) and expounded that the assets of a company listed on an international stock exchange could not be seized as to hold otherwise would disadvantage its body of independent shareholders. Seeing that these circumstances are akin to those in Cairn v. India, it is fair to speculate that obtaining control over assets of Air India will also be an uphill battle for the award-creditor. Nonetheless, it is not uncommon for this presumption to be refuted on the basis that governments exercise substantial control over the day-to-day affairs of SOEs. For instance, in Walter Bau AG v. Kingdom of Thailand, the German investor was able to impound a royal aircraft against a UNCITRAL award directing the Thai government to clear its debts owed to the said investor.

In other news, Cairn in an attempt to seize other Indian assets, has filed lawsuits in eight other countries, including France. On July 8, 2021, it was widely reported in global media that the Tribunal Judiciaire de Paris had ordered to freeze State-owned properties of India in France. Interestingly, on the same day, India’s Ministry of Finance released an official statement claiming that the government had not received any notice regarding such freezing thus indicating that it may have been an ex parte order. This statement also clarified that while India intends to challenge any adverse order, talks of settlement may not be entirely off the table either. Coming back to the instant US lawsuit, the principles originating in Bancec and later clarified in Crystallex may play a definitive role in deciding India’s fate. This includes looking closely into the constitution of Air India, the extent of governmental control and whether the sovereign is the real beneficiary of the company’s profit-making.  Thus, it remains to be seen if Cairn can establish that these requirements are met in the case of Air India.

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The Strange Case of Denial of Benefits Clauses: The Italian and Colombian Model BITs

Sat, 2021-08-07 01:00

First appearing in the 1970s, denial of benefits (DoB) clauses have proliferated, became more sophisticated, and evolved significantly and even beyond recognition as in the 2017 Colombian Model BIT. This post discusses such evolution and provides a taxonomy of the different versions of the clause.

 

Denial of Benefits Clauses in Outline

Traditionally, DoB clauses permit the Host State to exclude from treaty protection companies that formally have the nationality of the other Party, but are controlled or owned by nationals of a third State.

The notions of “control” and “ownership” are far from being uncontroversial and some treaties provide some clarification (Art. 21(3) BIT Japan Jordan). Sometimes DoB clauses combine nationality requirements with the absence of substantial business activities in the territory of the Host State (see, for example, Art. 17(1) Energy Charter Treaty).

Tribunals have not been entirely coherent in dealing with DoB clauses, often due to their different or vague wording. They have treated them as matter of jurisdiction (i.e. Ulysseas v. Ecuador; Guarachi v. Bolivia), or merits (i.e. Yukos v. Russian Federation; Ascom v. Kazakhstan; Bridgestone v. Panama). Furthermore, they have taken different views as to whether a denial of benefits can be exercised at any time (i.e. Ulysseas v. Ecuador; Guarachi v. Bolivia), or only before the institution of arbitral proceedings (i.e. Plama v. Bulgaria; Ascom v. Kazakhstan).

In recent years, investment treaties have extended the scope of DoB clauses to situations of corporate restructuring clearly intended to gain access to treaty protection (i.e. Art. 20, 2015 Indian Model BIT). The clause follows the original logic behind DoB clauses by allowing the Host State to neutralise aggressive treaty shopping. It is consistent with recent arbitral awards that have considered such practice as an abuse of rights (i.e. Philip Morris v. Australia).

Several other treaties require control or ownership by nationals of third States in combination with other situations such as

  • absence of diplomatic relations with the third State (Art. 21.1(a) BIT Israel Japan). The application of such clauses tends not to be problematic as the absence of diplomatic relations can be identified objectively.
  • absence of normal economic relations with the third State (Art. XII(a) BIT US Bahrain). The expression “normal economic relations” is rather vague. It has been expressly associated with unilateral economic sanctions and situations such as those existing in 1998 between the US and Cuba or Libya (Message to the US Congress on the ratification of the BIT US Mozambique (1998), Art. XII). Presumably, the clause also covers mandatory measures adopted by the UN Security Council as they are meant to upset “normal economic relations”. From this perspective, 103 of the UN Charter comes into play.
  • existence of measures with respect to third States, or even persons of third States (i.e. Art. 20, BIT Israel Japan), that prohibit transactions with the enterprise, or would be circumvented in case of application of treaty to such enterprise (Art. 14.14(2), USMCA). This category largely overlaps with the criterion of “normal economic relations”, as it relates to unilateral countermeasures and collective sanctions. It seems even broader as it may cover measures adopted directly against investors.
  • existence of measures related to the maintenance of peace and security (i.e. Art. 8.16(b)(i) CETA). The expression evokes the powers of the UN Security Council and again must be read in conjunction with Art. 103 of the UN Charter. The inclusion in some treaties of the protection of human rights within those measures remains rather obscure (see Art. 8.13, EU Japan).

These clauses inject some political content into DoB clauses. Yet, they do not normally provide for any procedural guarantees. It may be argued that these clauses are not entirely self-judging and that arbitral tribunals have at least some role in determining the existence of any of the situations referred to in the clause.

 

Italian Model BIT

Article 18 of the Italian Model BIT (on file with authors) incorporates quite a sophisticated DoB, which combines some of the categories included in the classification above. It requires ownership or control by nationals of a third state, cumulatively with (1) absence of normal economic relations with the third State or existence of measures related to the maintenance of international peace and security adopted against such State; or (2) “a proportionate reaction” by the Host State to “the serious deterioration of the political situation in the other country with respect to the rule of law, democracy and human rights” in the third State.

Paragraph 1 essentially combines the situations referred to in the taxonomy under (c) and (d) (see also Art. 13, BLEU Model BIT 2019; Art. 8.16 CETA). The language used in Art. 18(1) suggests that the measures related to international peace and security may be adopted unilaterally, or within the collective security system.

Paragraph 2 constitutes a novelty as the investor becomes the direct target of the unilateral response to the alleged violations committed by the third State. Its content and implications, however, raise concern. The situation that may trigger such response appears to be difficult to define in legal terms. Moreover, the treaty contains no procedural guarantees in favour of the investor, who is inevitably exposed to the unilateral political decision of the Host State. It is true that the investor may challenge the invocation of Art. 18 before an arbitral tribunal, but the level of deference such tribunal will exercise is difficult to anticipate.

 

Colombian Model BIT

The DoB clause contained in the 2017 Colombia Model BIT offers an interesting blend of traditional and new elements. The clause applies to enterprises of the other Party controlled or owned by nationals of third States if the Host State has no diplomatic relations with the third State, or maintains measures that prohibit transactions with the enterprise, or would be circumvented in case of application of treaty to such enterprise – paragraph (a); as well as to enterprises that do not have substantial business in the Host State – paragraph (c).

The scope of the clause has been further extended to two new categories. Under paragraph (b), the Host State may invoke the clause when the enterprise is controlled or owned by nationals of a third State and shareholders submit a treaty claim without a written authorization of the enterprise. The clause is meant to prevent parallel proceedings and any compensation granted to shareholders shall constitute the final compensation to the enterprise.

Paragraphs (d) and (e) are even more intriguing and innovative. Paragraph (d) allows the Host State to deprive the investor of treaty protection where the investor is an enterprise that has:

  • committed serious human rights violations;
  • sponsored persons or organisations sentenced for serious human rights violations or violations of humanitarian law, or sponsored internationally-listed terrorist organisations;
  • caused serious environmental damage;
  • committed serious tax and fiscal fraud;
  • committed acts of corruption;
  • caused grave violations of labour laws;
  • engaged in money laundering activities.

Importantly, paragraph (d) is triggered by a judicial or administrative decision certifying the commission of wrongdoings. From this perspective, a precedent can be found in the 2006 ECOWAS Supplementary Act. Art. 18(1) deprives the investor found in breach of its obligations concerning corruption of the right to initiate any dispute settlement process under the treaty.

Furthermore, under paragraph (e), the DoB clause applies when a local court has found the investor or the executives of an enterprise responsible for the violation of criminal laws.

With paragraph (d) and (e), the clause takes a completely different connotation, disconnected from the traditional requirements of control or ownership. It assumes the function of a sanction, which directly targets the enterprise for its wrongful practices.

Unlike the Italian Model BIT, the Colombian Model BIT provides a detailed procedure for the application of the clause. The Host State must promptly inform the investor and the Home State of its intent to invoke the DoB clause. All pending proceedings are suspended for 90 days and terminated in the absence of any objection by the Home State. Otherwise, and with exception of Paragraph 1 (a), the Bilateral Investment Council will try to reach a friendly solution within 6 months, during which proceedings are further suspended. If the Council intervention is not successful, the effectiveness of the DoB is to be settled by the dispute settlement mechanism invoked by the investor (be that a local court or tribunal). The procedure appears to provide a solid protection against abusive application of the clause.

 

Concluding remarks

DoB clauses were designed as technical clauses giving the Host State the possibility of limiting treaty protection to genuine investors of the other Party. They have evolved significantly in different directions, with the introduction of politically charged situations connected with the conduct of third States, such as economic sanctions or maintenance of peace and security.

With the Colombian Model BIT, the clause performs an additional new function as the Host State may deprive the enterprise of the treaty protection in response to a comprehensive catalogue of wrongful acts committed by the enterprise itself. Ownership and control become less dispositive. While the procedure set in the treaty seems to adequately protect the investor against abuses, the clause ultimately offers the Host State an important tool to recalibrate its relationship with investors.

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The Gift that Keeps on Giving: New Evidentiary Developments in the Canadian Installment of the Yukos Saga

Fri, 2021-08-06 01:32

Much ink has been spilled on the 2014 Yukos arbitral awards, and rightfully so. They are notorious for collectively breaking the previous record for the largest arbitral award in history. Their magnitude (these were, in the tribunal’s words, “mammoth arbitrations”) also commands our attention, as do the issues at stake and the multiple companion arbitrations and enforcement proceedings around the globe that have sprung like mushrooms after the rain. One of such related cases is Luxtona Limited v. The Russian Federation, a PCA-administered, Toronto-seated UNCITRAL arbitration brought by a former Yukos shareholder. Though the tribunal has thus far only rendered an interim award on jurisdiction in 2017, the case is noteworthy as it shines the light on the Canadian judiciary’s take on the all-so-important issue of new evidence in the context of court proceedings under Art. 16(3) of the UNCITRAL Model Law (“ML”).

On June 30, 2021, the Ontario Superior Court of Justice (“Court”) allowed Russia to file new evidence because the Court was considering the issue of jurisdiction de novo, as opposed to reviewing the tribunal’s ruling. In reaching its conclusion, the Court drew inspiration from international authorities, including the UK Supreme Court judgment in Dallah v. Pakistan (“Dallah”), which was previously extensively discussed on this blog (for example, here and here).

 

The Evolving View of the Court

By way of reminder, Art. 16(3) provides that “if the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the Court to decide the matter […].”

Interestingly, this was the third time the Court grappled with the issue of evidence in this case. Russia initially sought to set aside the tribunal’s award pursuant to Arts. 16(3) and 34(2) ML. In April 2018, Dunphy J. allowed Russia to file new evidence as of right because “[t]he court is directed to ‘decide the matter’ and not merely to review the decision of a tribunal whose very existence may or may not have been authorized” (2018 ONSC 2419, para. 33). Russia’s new evidence included two expert reports: one, which allegedly responded to the tribunal’s “incorrect findings”, and the other, which addressed statutory interpretation arguments that had evolved “following the hearing [before the tribunal] in response to positions asserted by Professor Stephan in reports submitted to the Hague Court of Appeal” in a different case (Professor Stephan is also Luxtona’s expert). In response, Luxtona filed additional expert evidence on Russian law.

Due to changes in judicial assignments, the application was reassigned to Penny J. who first accepted but then questioned Dunphy J.’s ruling and asked the parties “to reargue the narrow question of whether new evidence, which does not meet the test for new evidence under Ontario Law, is admissible on a court review of an arbitral tribunal’s jurisdiction under Art. 16(3)” (2019 ONSC 4503, para. 38). As Dunphy J.’s decision was merely an earlier evidentiary ruling, Penny J. could revisit and reverse it, as he did in December 2019 (2019 ONSC 7558). He determined that Russia could not file fresh evidence as of right. Rather, it had to show that “(1) the evidence could not have been obtained using reasonable diligence; (2) the evidence would probably have an important influence on the case; (3) the evidence must be apparently credible; and (4) the evidence must be such that if believed it could reasonably, when taken with the other evidence adduced at the hearing, be expected to have affected the result,” (para. 69) which Russia failed to demonstrate.

Penny J.’s decision was appealable with leave to the branch of the same Court, known as the Divisional Court, pursuant to s. 19(1)(b) of the Courts of Justice Act. Leave was granted in August 2020 (2020 ONSC 4668) and Penny J.’s decision was set aside in June 2021.

Why have there been so many different answers to a, seemingly, straightforward question within the same Court? Three main themes of divergence can be identified: (1) the relevance of authorities from a non-ML jurisdiction; (2) the significance and international acceptance of Dallah, and (3) the pertinence of United Mexican States v. Cargill, Inc. (“Cargill”) in the context of Art. 16(3) applications.

  1. After comparing the ML and UK legislation, Penny J. noted that the emphasis and scope for court intervention in the decisions of arbitral tribunals under the two statutory regimes differed significantly (so much that the UK approach undermined the competence-competence principle). Thus, English decisions were to be carefully scrutinized before being adopted in Ontario.1) 2019 ONSC 7558, paras. 54-55, 60-62. jQuery('#footnote_plugin_tooltip_38325_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Conversely, the Divisional Court opined that there was no compelling reason to distinguish the nature of jurisdictional hearings under the two regimes.2) 2021 ONSC 4604, para. 33. jQuery('#footnote_plugin_tooltip_38325_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });
  2. With respect to Dallah, Dunphy J. observed that the international ML jurisprudence was quite unanimously in line with the approach suggested by Dallah and Cargill in the sense that a court need not defer to the decision of the tribunal on jurisdictional matters, nor is it explicitly confined to the record before such tribunal.3) 2018 ONSC2419, para. 28 jQuery('#footnote_plugin_tooltip_38325_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Penny J. referred to Dallah briefly, noting its silence on the matter of new evidence.4) 2019 ONSC 7558, para. 46. jQuery('#footnote_plugin_tooltip_38325_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Au contraire, the Divisional Court discussed Dallah extensively, concluding that it enjoyed “strong international consensus” and was cited by the Ontario Court of Appeal in Cargill with approval.5)2021 ONSC 4604, paras 30, 38. jQuery('#footnote_plugin_tooltip_38325_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });
  3. Cargill (previously discussed here) concerned Mexico’s application to set aside pursuant to Art. 34(2)(a)(iii) ML a NAFTA award that allegedly granted the investor losses in excess of the tribunal’s jurisdiction. Dunphy J. held that the “ratio” of Cargill was applicable to Art. 16(3) applications, adding that neither of these provisions constrained the Court to the four corners of the arbitration’s evidentiary record.6)2018 ONSC 2419, paras. 32-33. jQuery('#footnote_plugin_tooltip_38325_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Penny J., while recognizing Cargill’s relevance for applications under both articles of the ML, highlighted that Cargill clearly described that “[o]n a true jurisdictional challenge, it is a review on correctness, without any deference, … but a ‘review’ nevertheless.”7)2019 ONSC 7558, paras. 57-58. jQuery('#footnote_plugin_tooltip_38325_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Contrary to Dunphy and Penny JJ., the Divisional Court underscored that Cargill concerned Art. 34(2), which envisages a different test, i.e. a “review”. The Court of Appeal in Cargill “did not decide whether an application under Art. 16 [was] a ‘review’ or a hearing de novo,” nor did it comment on Dallah’s applicability under Art. 16(3).8)2021 ONSC 4604, paras. 23-24, 32. jQuery('#footnote_plugin_tooltip_38325_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

A Closer Look at the Court’s Most Recent Decision in Light of Cargill and Dallah

By way of reminder, in Cargill the Court of Appeal discussed Dallah, albeit noting that the jurisdiction issue before it was “quite different under Art. 34(2)(a)(iii)” as it did not concern the ability of the tribunal to adjudicate altogether, but the content of the award itself. The Court of Appeal concluded that the standard of review was correctness, meaning that on a “true question of jurisdiction, the tribunal had to be correct in its assumption of jurisdiction to decide the particular question it accepted.”9)2011 ONCA 622, para. 53. jQuery('#footnote_plugin_tooltip_38325_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The same court, however, cautioned that the standard of correctness does not presuppose “a broad scope for intervention in the decisions of international arbitral tribunals, [rather] only in rare circumstances where there is a true question of jurisdiction.”10)ibid., para. 44. jQuery('#footnote_plugin_tooltip_38325_30_10').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

On the one hand, the Divisional Court says that Art. 34(2) which was at the center of Cargill, prescribes “the limited review” and provides for a different standard than Art. 16(3) (paras. 23-24). On the other, it upholds the de novo approach of Dallah, which concerned Art. V(1)(a) of the New York Convention which is much more similar to Art. 34(2) than Art. 16(3) ML. Can the two decisions be reconciled? Both concerned similar provisions, yet Dallah allowed a de novo hearing whereas Cargill provided for a review (on the standard of correctness).

If Cargill is not directly pertinent because it revolves around Art. 34, why is Dallah’s de novo approach applicable to an Art. 16 application? Is Dallah relevant whenever the existence of the arbitration agreement is in question, irrespective of which provision of the ML is invoked? This arguably leaves room for Dallah’s de novo approach in the context of an Art. 34(2) application, if the jurisdictional issue concerned the existence of the arbitration agreement (and not the award’s content, as in Cargill). If the de novo approach presupposes that a party can submit new evidence as of right, new evidence could then be introduced on an Art. 34(2) challenge to the final award. Would this be conducive to certainty, efficiency, fair play?

Conversely, if Dallah’s de novo approach is applicable only in the context of Art. 16(3) proceedings (because courts are invited to “decide the matter”), why should a party be able to file new evidence as of right just because the tribunal ruled on the jurisdictional issue as a preliminary question, and not have that same right if the tribunal did so in the final award?

 

Conclusion

Though Canadian authorities dealing with Art. 16(3) ML are rare, they appear to demonstrate the expansion of the courts’ role in recent years. In 2005, the Alberta Court of Queen’s Bench held that, despite the appearance of “wide discretion”, Art. 16(3) did not go “so far as to allow a reviewing court to substitute its view simply because the court would not have reached the same conclusion,” and that the standard of review ought to be “one of reasonableness, deference and respect” (para. 53). In February of this year the Ontario Court of Appeal discussed Art. 16(3) ML in United Mexican States v. Burr, albeit focusing on other parts of the provision. Perhaps it is instructive that, when quashing Mexico’s appeal, the court underscored that the text of said provision prohibited an appeal from “the ruling of a Superior Court judge on the correctness of an arbitral tribunal’s ruling” (para. 26). Now, the Divisional Court ruled in favor of a de novo hearing. Courts in Québec also seem to lean towards the de novo approach (see, e.g., Groupe Dimension Multi Vétérinaire inc. c. Vaillancourt, para. 10).

Ultimately, whatever the nature of the court’s involvement or the standard of review, should a party be allowed to file new evidence as of right? While situations when it may be necessary to admit “new” evidence exist (for example, under the conditions enumerated by Penny J., or if a party did not participate in the arbitration and only decides to become involved after the tribunal it does not recognize rules that it has jurisdiction), what is the justification when a party participated in the arbitration all along? Despite the ML’s evasiveness on this point, the drafters’ intention to circumscribe court intervention under Art. 16(3) is evident from the 30-day deadline, absence of appeal and the tribunal’s discretion to proceed while the matter is pending before the court (para. 26).

The arbitral tribunal in the present case has reportedly suspended its proceedings while the Canadian challenge is pending. Four years after the tribunal’s interim award, the Court’s decision on jurisdiction is nowhere in sight (introducing new evidence will certainly not expedite the matter). Is this the “immediate court control” that the ML’s creators had in mind?

 

*The views expressed herein are those of the author and do not necessarily reflect the views of Woods LLP or its partners.

References[+]

References ↑1 2019 ONSC 7558, paras. 54-55, 60-62. ↑2 2021 ONSC 4604, para. 33. ↑3 2018 ONSC2419, para. 28 ↑4 2019 ONSC 7558, para. 46. ↑5 2021 ONSC 4604, paras 30, 38. ↑6 2018 ONSC 2419, paras. 32-33. ↑7 2019 ONSC 7558, paras. 57-58. ↑8 2021 ONSC 4604, paras. 23-24, 32. ↑9 2011 ONCA 622, para. 53. ↑10 ibid., para. 44. function footnote_expand_reference_container_38325_30() { jQuery('#footnote_references_container_38325_30').show(); jQuery('#footnote_reference_container_collapse_button_38325_30').text('−'); } function footnote_collapse_reference_container_38325_30() { jQuery('#footnote_references_container_38325_30').hide(); jQuery('#footnote_reference_container_collapse_button_38325_30').text('+'); } function footnote_expand_collapse_reference_container_38325_30() { if (jQuery('#footnote_references_container_38325_30').is(':hidden')) { footnote_expand_reference_container_38325_30(); } else { footnote_collapse_reference_container_38325_30(); } } function footnote_moveToReference_38325_30(p_str_TargetID) { footnote_expand_reference_container_38325_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38325_30(p_str_TargetID) { footnote_expand_reference_container_38325_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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ECT Modernisation Perspectives: An Update

Thu, 2021-08-05 01:00

From 20-26 July last year, this Blog ran a series on the Energy Charter Treaty (ECT) modernisation process. The Energy Charter Conference (the Conference) had recently established a Modernisation Group (the Subgroup) to conduct the modernisation negotiations, and the series aimed to provide updates to readers on various aspects of that process. At the time of the series, the Conference had just finished its first formal round of modernisation negotiations. Fast forward a year later to this update and a second (8-11 September 2020), third (3-6 November 2020), fourth (2-5 March 2021), fifth (1-4 June 2021), and sixth (6-9 July 2021) negotiation round have been conducted. This post provides an update on these latest rounds, to provide a snapshot of where the modernisation process is up to. As the post highlights, while things have moved forward since our series last year major divergences remain unresolved.

 

Is the ECT Moving Closer towards Protecting Cleaner, Greener Energy Investments?

The ECT has come under intense scrutiny and criticism for allegedly protecting the fossil fuel industry, on the one hand, and undercutting sovereignty, on the other. The criticism can be summarised as follows:

The ECT is an antithesis to the Paris Agreement, allowing fossil fuel companies to sue countries over their climate policies rather than strengthening the global response to climate change. … It protects all investments in the energy sector, including coal mines, oil fields and gas pipelines. Any state action that harms a company’s profits from these investments can be challenged outside of existing courts, in international tribunals consisting of three private lawyers. Governments can be forced to pay huge sums in compensation if they lose an ECT case.

The ECT modernisation process has continued to bring these issues into sharp focus. One key issue has been the connection between the environmental objectives that have become a focus in the modernisation process, and the definition given to the concept of “economic activity in the energy sector” (EAES). This defines which economic activities may benefit from investment protection under the ECT. It has been suggested that such concept could be redefined, for example, to exclude protection for fossil fuel investments. A more detailed overview of the concept of EAES in the ECT is available here. The negotiations have continued to focus on potential innovations to the scope and coverage of the ECT in this regard. During the fifth negotiation round, for example, it was suggested that there was a “need to amend the relevant provisions [on EAES] in light of the Contracting Parties’ individual climate goals and their specific energy mixes”. It was further noted that various proposals had been put forth, yet, “while there are different proposals on the definition of economic activity in the energy sector, all proposals favour the transition to a low carbon consumption society”.

In future negotiating rounds, a particularly relevant question will remain how best to balance investment protection with broader environmental goals. While adjustments to the definition of what constitutes an EAES might bring some degree of recalibration, States parties to the negotiations are also considering broader reform options. This includes, inter alia, the possibility for reforming the treaty to more objectively acknowledge goals related to sustainable development, the environment, climate change, and corporate social responsibility (CSR). The summary of the second negotiation round indicates, for example, that:

The discussions included comments and proposals on the right to regulate, relevant multilateral environmental agreements, climate change and the clean energy transition such as the Paris Agreement, international standards of labour protection, responsible business practices, the conduct of environmental impact assessment and good governance (transparency).”

The EU, in particular, has been characterized as a key stakeholder capable of making the ECT “the greenest investment treaty of them all”. The European Commission has indicated as part of the modernisation process its determination to reform investment protection standards and ISDS, on the one hand, while including new provisions on sustainable development and climate change, on the other. The Commission has stated that “[o]ne of the objectives of this reform is to align the ECT with the Paris Agreement and the objectives of the Green Deal”. Such mission is manifested in, for example, suggested definitional changes. The Commission is committed to pursuing the modernisation negotiations but has indicated that it will not abandon “core EU objectives, including alignment with the Paris Agreement”. It has even indicated that it may withdraw from the ECT altogether if these “core EU objective[s]” are not achieved.

The crux of the matter is whether the ECT, in its current form, “restricts countries’ ability to regulate and speed up the green transition of the energy sector”, or unduly privileges and protects coal and other dirty energy sources. At the same time, the origins and purpose of the ECT must not be forgotten. It is a treaty designed foster energy cooperation and to ensure the protection of energy investments. How then should the treaty be reformed so that the move towards a cleaner, greener treaty does not unintentionally undercut the investment protection needed to promote and attract energy (including green energy) investments? Such balancing and reconciliation is a daunting task.

 

Changes to Substantive and Procedural Investment Protections: What is Needed and What has Been Achieved?

Authors on this Blog have previously discussed possible reforms to the ECT’s denial of benefits clause, the fair and equitable treatment provision, as well as possible reforms to the valuation approaches adopted by ECT tribunals. These issues have continued to dominate the focus of the ECT modernisation process in subsequent negotiation rounds. In the third negotiation round, for example, the Subgroup discussed inter alia the definitions of investor and investment, the incorporation of a right to regulate clause, and the scope of the treaty’s most constant protection standard. So, too, in the fourth negotiation round, the Subgroup discussed inter alia possible adjustments to the treaty’s fair and equitable treatment, denial of benefits, indirect expropriation, most favored nation protection, and umbrella clauses. The parties “continued to clarify similarities and differences in their positions with a view to advance negotiations to the drafting of compromise proposals”. Reportedly, good progress was made and the Secretariat was mandated “with the drafting of draft compromise proposals to be considered during one of its next negotiation rounds in 2021”. The sixth negotiation round focused on several of these proposals, with the Subgroup reportedly making considerable progress on reforms to the definitions of “investment” and “investor”, “indirect expropriation” and denial of benefits. As the draft text being proposed and discussed has not been publicly released, it remains to be seen whether such adjustments largely replicate the status quo or result in significant innovations.

Authors on this Blog have also widely discussed possible ISDS reform, much of which is relevant with respect to the ECT. The ECT modernisation process has engaged in each negotiation round with possible ISDS reforms. This includes, for example, provisions to regulate frivolous claims, third party funding, security for costs, increased transparency, etc. The negotiation rounds have indicated the intention of ECT States Parties to reflect on the discussions taking place in UNCITRAL and ICSID vis-à-vis such reform options. The EU, for example, has indicated that its “ultimate goal is to make a future multilateral investment court applicable to disputes under the ECT”. Meanwhile, however, Japan, Kazakhstan, Azerbaijan and other States have indicated reluctance to agree to such reforms. As with every negotiation in a multilateral setting, give-and-take is key. As the ECT Secretary-General has stated: “Undermining the ECT modernisation process through unrealistic requirements might be dangerous as such calls could easily become a self-fulfilling prophecy”.

 

ECT Reform: Impossible or Imaginable?

We provide this update on ECT modernisation efforts with a moderately optimistic feeling. Serious discussions have been undertaken and compromises are likely to slowly emerge. Indeed, even at the outset of the modernisation process, sceptics predicted that the Contracting Parties would not be able to agree on a list of topics for negotiations, yet they did. Now, sceptics claim that reform is “extremely unlikely”. One thing is – at least – as clear now as it was when our ECT series was published last year: “certain provisions in the treaty are simply outdated” and, as Dr. Baltag explained, “[m]ost Contracting States to the ECT are in favor of modernisation. The disagreement, if any, will be on the wording of the provisions.”

It is therefore hoped that ECT States Parties can come together to improve the treaty. If not, the ECT stands only to fail. As the ECT Secretary-General said: “The stakes are high. If the modernisation process fails, I don’t see a future for the Treaty.” Yet, the dismantling of the ECT could itself “seriously hamper the ability of the world to meet the Paris climate targets. The Paris Agreement does not protect investment. The Energy Charter Treaty does. It’s a complement to the Paris agreement.” The bottom line is this: the ECT is still important, it has an important role to play, but it needs to “modernise” to meet the demands of the future.

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SCC Express: A Shortcut or A Detour?

Wed, 2021-08-04 01:00

In late May 2021, the Swedish Chamber of Commerce (“SCC”) announced its most recent dispute resolution tool – SCC Express, a process conducted under the SCC Rules for Express Dispute Assessment (the “Rules”). SCC Express is marketed as “… a fast and simple way to get a neutral, legal assessment of the disputed matter – enabling you and your counterparty to move on faster”. As this blog post shows, this holds true in a limited array of situations.

 

What is SCC Express?

SCC Express is a confidential consent-based dispute assessment process. In order to initiate it, parties are required to explicitly consent to the same. The consent may be given at any time – in a prior contract between the parties or when the dispute arises (Art 2(2) of the Rules).

Once the presence of consent is confirmed, SCC appoints a legal expert (a “Neutral”) who provides a legal assessment of the parties’ dispute within three weeks for a fixed fee of EUR 29,000. The Neutral is appointed by the SCC Board taking into consideration any proposals made by the parties (Art 6(1) of the Rules). In practice, parties should also be able to agree on the specific type of Neutral when providing their consent to participate in the proceedings.

 

What Do You Get for EUR 29,000?

SCC Express is a hybrid between mediation and arbitration. The proceedings may therefore be more inquisitorial compared to a typical arbitration. For the same reason, the legal assessment delivered by the Neutral is neither a decision nor an award but consists of the Neutral’s findings. These findings are not enforceable under the New York Convention and are not binding on the parties unless they contractually agree to make them binding, i.e. through the transformation of the findings into a binding decision (Art 2(4) of the Rules) through, for example, a recorded settlement agreement. It should be possible for the parties to agree on this at any time, meaning both before, during, or after the delivery of the Neutral’s findings.

As an alternative, and in line with general arbitration principles, the parties may of course agree to appoint the Neutral as an Arbitrator whereby the SCC Express proceeding and resulting findings would be transformed into an arbitration proceeding and an arbitral award respectively (Arts 2(4) and 6(5) of the Rules). Besides consent from the disputing parties, this alternative also requires the consent of the appointed Neutral (Art 2(4) of the Rules).

Where the parties agree to transform the SCC Express proceeding into full-fledged arbitration – and thereby also agree on arbitration rules applicable to such proceeding – the cost for the arbitration proceeding will be in line with those rules. It is currently unclear if in this case the parties would be charged for the initial SCC Express proceedings in addition to the arbitration, especially if the parties agree on one of the available SCC arbitration rules.

In sum, what you get for your EUR 29,000 is either (i) a non-enforceable and non-binding summary of findings, (ii) a non-enforceable but binding decision, or, at a presumed additional cost, (iii) an arbitral award.

 

Is it Worth it?

In all honesty – and very much cliché – it depends. There might be certain situations, for example between two disputing parties with a long-standing relationship, where the sort of “mutual counsel” that the Neutral represents may be respected by both parties and their findings or decision accepted by both sides. The likelihood of acceptance is of course greater where the parties – before the dispute arises – choose to agree on a contractually binding decision rather than mere findings of the Neutral. That said, such parties may already be inclined to settle the dispute without the need to pay the SCC Express fee.

However, for most other parties, where a dispute of a certain magnitude arises, it is not a given that both parties will honour the findings or agree to make them contractually binding. One reason for this may be the costs attached to such course of action.

With the fee of EUR 29,000, the disputed amount would have to be at least EUR 300,000 for SCC Express to be financially competitive with the costs of a full-fledged arbitration. In comparison, the SCC’s cost for arbitration proceedings (with one arbitrator) under the ordinary SCC arbitration rules would be approximately EUR 32,000 with an amount in dispute of EUR 300,000. The SCC’s cost for proceedings under the SCC expedited rules with the same amount in dispute would only amount to approximately EUR 21,000. In such a case, a party may well ask itself whether it is willing to spend money on a Neutral or simply attempt to obtain a final and enforceable award as soon as possible.

At the cost of EUR 29,000, the dispute that a party seeks to settle must be sizeable to warrant an early additional cost of a Neutral. Alternatively, the dispute must be such that early determination by the Neutral is likely to limit further legal costs. It is hard to imagine that many parties would engage with SCC Express without involving their counsel. In essence, SCC Express proceedings will incur legal fees as well as any other proceedings, albeit for a shorter period than in ordinary or expedited arbitration. The latter costs are harder to control than the costs related to SCC Express and an investment into such costs must be counter-balanced by the likelihood of early settlement.

In considering whether to agree to SCC Express, parties may also want to keep in mind that under SCC expedited arbitration, there is a 50 % chance that the tribunal renders an enforceable award within 3 months from referral and a 90 % chance that the award is rendered within 6 months from referral.

Other reasons that may tip the balance in favour or against SCC Express can include, e.g. the factual complexity of the dispute, the availability of evidence without a document production phase and the need to obtain a swift decision.

 

Is SCC Express a Shortcut or an (Expensive) Detour?

On the one hand, the parties may end up spending EUR 29,000 plus legal fees to obtain non-enforceable and non-binding findings at the end of three-week-long proceedings. If one party chooses not to adhere to the findings, the disputing parties would have no choice but to initiate arbitration at a cost (given above example) of additional EUR 21,000 plus legal fees and lost time resulting from the SCC Express proceedings. On the other hand, the parties may be able to resolve their dispute as a result of the Neutral’s findings, making the investment worthwhile. This may be the case, for example, where the parties to the dispute are willing to settle but need that little extra nudge in the right direction by a person perceived as more neutral than both parties’ counsel.

All things considered, SCC Express may be a shortcut to both parties’ satisfaction in a limited number of situations. However, prospective adopters should be aware that – given the obvious alternative of expedited arbitration under SCC rules – starting SCC Express proceedings might simply become a detour entailing higher costs, more time, and additional frustration between the parties.

Considering the cost of SCC Express, it is clear that this innovative tool is targeted at the early resolution of larger disputes. As disputed amounts must be above EUR 300,000 before it is worthwhile to pay the fixed SCC Express fee and still risk going through another process, it becomes evident that parties to smaller disputes are better off resolving their dispute through negotiations or referring the dispute to expedited arbitration.

In case of larger disputes, however, SCC Express may well prove to be efficient. Parties to larger disputes often conduct settlement negotiations in the background and this tool may well assist them in moving those discussions forward, or avoiding them altogether. In such multi-million or billion disputes, the price tag related to the early evaluation of the case is less relevant. What matters in those instances is the authority that the evaluation by a Neutral can provide. That authority is, however, dependent on SCC’s ability to find a capable and diligent Neutral to provide her or his findings under the relevant applicable law, and on the diligence and clarity of the Neutral in formulating her or his findings. Time will tell whether SCC can find the right people for the job and whether parties will trust the process and turn this innovative tool into a revolutionary way of precipitating dispute resolution instead of adding yet another step to it.

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Recognition, Enforcement or Execution? The Full Federal Court’s Nuanced Examination of Foreign Awards in Australia

Tue, 2021-08-03 01:38

The International Convention on the Settlement of Investment Disputes (ICSID Convention) contains two provisions regulating compliance with arbitral awards. Article 53(1) provides that an award shall be binding on the parties. Article 54(1) requires each contracting State to recognise an ICSID award as binding. In this regard, it is common for parties to comply with ICSID awards without the need for court intervention.1)ICSID Convention, Regulations and Rules, ICSID/15 April 2006. jQuery('#footnote_plugin_tooltip_38298_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38298_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); However, States do sometimes seek to resist their Convention obligations, in which case the matter may end up before a domestic court. In Kingdom of Spain v Infrastructure Services Luxembourg [2021] FCAFC 3 (Judgment), the Full Federal Court of Australia allowed an appeal in relation to the application of the Foreign States Immunities Act 1985 (Cth) (FSIA) to ICSID awards rendered against contracting States to the ICSID Convention. Doing so, it confirmed that no defence of sovereign immunity will be available to a State seeking to resist recognition of an ICSID award. It also laid down clear principles for the recognition of awards made under the ICSID Convention.

 

First Instance Decision

The two ICSID disputes at issue in the Australian court proceedings related to the investment of EUR 139,500,000 in solar power generation projects, and a series of financial incentives which the investors had relied upon when investing in Spain. The investors successfully obtained two ICSID awards against Spain for its failure to accord fair and equitable treatment of the investors, in breach of Art 10(1) of the Energy Charter Treaty. The Australian Federal Court granted the applicant investors leave for the recognition and enforcement of the awards. This decision was appealed by Spain. The principal issue upon appeal remained sovereign immunity, and whether ratifying the ICSID Convention constituted submission to jurisdiction.

 

Decision on Appeal

The Full Federal Court allowed the appeal. Doing so, it distinguished between “recognition” and “enforcement” of the awards, noting that the orders to which the applicant was entitled were those that reflected the outcome of a recognition proceeding, not one of enforcement.

The Court held that, as a general concept, recognition refers to the formal confirmation by a court that an arbitral award is authentic and has legal consequences under municipal law. In essence, the purpose of recognition is for the award to be recognised as binding. Enforcement, however, goes a step further, and refers to the process by which a successful party seeks the municipal court’s assistance in ensuring compliance with the award (as recognised) and obtaining the redress to which it is entitled. Execution refers to the formal process by which enforcement is carried out (at para 26).

Despite this broad outline, which the Court acknowledged was “simplistic”, the Court concluded that the proceeding was one of recognition. This is not a straightforward conclusion, as the ICSID Convention does not prescribe how to make an application for recognition; this is left to the domestic law of a contracting State.

In the Australian context, the International Arbitration Act (Part IV, and particularly s35) governs ICSID awards. The Court acknowledged that interpretation of section 35 is not without difficulty (at para 43). While it is headed ‘Recognition of awards’, this section does not explicitly confer an entitlement on a party to seek recognition of an award, it instead refers only to enforcement. The Court concluded that a construction that gives effect to Australia’s international obligations should be preferred, and as such “enforced” should be read as including “recognised” in the International Arbitration Act.

Whether Spain could rely on a defence of State immunity in response to an application for recognition required analysis of the text of Articles 54 and 55 of the ICSID Convention.

In its analysis of Articles 54(1) and (2) of the ICSID Convention, the Court concluded that two distinct applications are contemplated. If the term enforcement in Article 54(2) were synonymous with recognition, this distinction would be redundant (at para 27). A party may seek recognition of an award without seeking its enforcement. Article 54(2) also provides for a party to apply for enforcement of an award without first applying for its recognition (at para 29).

The question then was whether Articles 54(1) and (2) constituted a submission to jurisdiction. If execution were read as including recognition in Article 55, the qualification of State immunity would consume the entire operation of Article 54. The recognition procedure in Article 54(2) would never be available against a State, rendering the obligation for a contracting State to recognise an award in Article 54(1) obsolete (at para 33). The Court held that such a conclusion would be perverse; Article 55 does not refer to recognition and there can be no warrant for reading it as if it did.

The Court concluded that Spain had agreed to submit to the jurisdiction of the Federal Court by virtue of those Articles in relation to a recognition proceeding, and Article 55 could have no impact on that conclusion. The Full Court thus held that sovereign immunity did not prevent parties from seeking recognition of an ICSID award, but made no decision as to the defence of sovereign immunity from enforcement proceedings.

 

Comments

The decision of the Full Court draws a clear distinction between recognition and enforcement of ICSID awards, and leaves open the extent to which a foreign State can rely on its immunity to defeat enforcement proceedings and execution against its assets. The position in Australia is that Article 54(2) constitutes a submission to jurisdiction for the purpose of recognition. There are distinct questions remaining as to how the Court would settle the issues of State immunity from jurisdiction for the purpose of enforcement proceedings, and immunity from execution against foreign State property.

The orders for recognition made in relation to Kingdom of Spain were published on 25 June 2021. These shed light on what is contemplated by recognition. The Court made an order that:

The Court hereby and in these orders recognises as binding on the respondent (the Kingdom of Spain) the award of the International Centre for Settlement of Investment Disputes… and pursuant to s 35(4) of the International Arbitration Act 1974 (Cth) the Court orders that judgment be entered in favour of the applicants against the respondent for the pecuniary obligations under the Award…

The orders go on to explicitly state that “Nothing in Order 1(a) shall be construed as derogating from the effect of any law relating to immunity of the respondent from execution.” These orders clarify that the Court sees its role in recognition proceedings as being limited to acknowledging the binding nature of ICSID awards on the parties (including State parties). The question of whether a State could claim a form of immunity (from execution or jurisdiction) against an attempt to compel compliance is expressly reserved and would be a matter for future consideration if the respondent did not voluntarily comply with the award (as recognised).

The recognition and enforcement of judgments made by foreign courts in Australia under the Foreign Judgments Act 1991 (Cth) (Foreign Judgments Act) faces similar hurdles. In Firebird Global Master Fund II Ltd v Republic of Nauru [No 2] [2015] HCA 53, the High Court of Australia held that foreign State immunity does not prevent proceedings to register a foreign judgment in circumstances where that judgment concerns a commercial transaction.

In that case, Nauru applied to have registration and garnishee orders (made by the Supreme Court of New South Wales) set aside, claiming, amongst other things, that proceedings to register a judgment invoked “the jurisdiction of the courts of Australia in a proceeding” within the meaning of section 9 of the FSIA, and Nauru was accordingly entitled to immunity from jurisdiction. The High Court held that Nauru was not immune from jurisdiction because the proceedings “concerned a commercial transaction” and therefore fell within an explicit exception to immunity in section 11 of the FSIA. Notably, the High Court dismissed the argument put forward by Firebird, that proceedings for registration of a judgment were not captured by section 9 of the FSIA; section 9 would have applied, but for the exemption.

Following the decision in the High Court, we know that a sovereign State’s immunity against suit extends to the registration of a foreign judgment under the Foreign Judgments Act, but can be lost where there is a statutory exception in the FSIA. The text of the Foreign Judgments Act clearly contemplates that enforcement (as defined in that Act) will follow registration. However, whether a judgment can be executed will depend on whether a State could then claim immunity of assets; as was the case in Firebird; this involves an assessment of whether State property in the jurisdiction can be classified as “in use” for “commercial purposes”.

With regard to guidance on recognition and enforcement of ICSID awards from other jurisdictions, courts in the UK have repeatedly affirmed the primacy of the UK’s obligation to recognise and enforce awards under the ICSID Convention. However, they have not drawn or considered a distinction between recognition (known in the UK as registration) and enforcement.

The Arbitration (International Investment Disputes) Act 1966 (UK Arbitration Act), and the Civil Procedure Rules 1998 part 62.21 outline a procedure for registration and enforcement of ICSID awards in the UK that reinforces a non-interventionist regime. The UK legislation expressly sets out how parties may apply for registration of an award and prescribes the effect of registration; a registered award “as respects the pecuniary obligations which it imposes, [shall] be of the same force and effect for the purposes of execution as if it had been a judgment of the High Court”. The UK Arbitration Act goes on to explain that proceedings may be taken on the award, interest will accrue, and the High Court has control of execution. While there is greater clarity as to the process for applying for registration and enforcement in the UK, the same issues of State immunity from jurisdiction and immunity of State property could arise if investors seek to execute ICSID awards in the UK, as the State Immunity Act 1978 would apply.

So where do we go from here? In relation to ICSID awards, sovereign immunity defences will only be available to a State at the point that the creditor seeks to enforce and execute that ICSID award against assets located in Australia. In earlier recognition type proceedings, Article 54(2) will be considered a submission to the jurisdiction of the courts of Australia as a contracting State to the ICSID Convention. In distinguishing recognition from enforcement and execution, the Court has clarified what recognition in relation to ICSID awards entails. The orders made by the Federal Court on June 2021, unlike those at first instance, do not grant leave for the applicant to enforce the award, rather they are limited to an acknowledgment of the binding nature of the ICSID award and recording a judgment in favour of the award creditor for amounts payable under the award. Recognition of an award by another contracting State may apply some pressure on a debtor State to comply with its obligations under the ICSID Convention. However, if there is further recalcitrance an investor may have to combat arguments of State immunity in relation to enforcement and execution.

References[+]

References ↑1 ICSID Convention, Regulations and Rules, ICSID/15 April 2006. function footnote_expand_reference_container_38298_30() { jQuery('#footnote_references_container_38298_30').show(); jQuery('#footnote_reference_container_collapse_button_38298_30').text('−'); } function footnote_collapse_reference_container_38298_30() { jQuery('#footnote_references_container_38298_30').hide(); jQuery('#footnote_reference_container_collapse_button_38298_30').text('+'); } function footnote_expand_collapse_reference_container_38298_30() { if (jQuery('#footnote_references_container_38298_30').is(':hidden')) { footnote_expand_reference_container_38298_30(); } else { footnote_collapse_reference_container_38298_30(); } } function footnote_moveToReference_38298_30(p_str_TargetID) { footnote_expand_reference_container_38298_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38298_30(p_str_TargetID) { footnote_expand_reference_container_38298_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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